By Lidia Kelly and Alissa de Carbonnel
MOSCOW/PEREVALNOYE, Ukraine (Reuters) - Russia paid a heavy financial price on Monday for its military intervention in neighbouring Ukraine, with stocks, bonds and the rouble plunging as President Vladimir Putin's forces tightened their grip on the Russian-speaking Crimea region.
The Moscow stock market fell by 11.3 percent, wiping nearly $60 billion off the value of Russian companies in a day, and the central bank spent $10 billion of its reserves to prop up the rouble as investors took fright at escalating tensions with the West over the former Soviet republic.
U.S. Vice President Joe Biden warned Moscow of "increasing political and economic isolation" if it did not withdraw troops and the European Union threatened unspecified "targeted measures" unless Russia returns its forces to their bases and opens talks with Ukraine's new government.
In his first public appearance for nearly a week, Putin flew to watch military manoeuvres in western Russia in what appeared designed as a show of strength.
Russia's Black Sea fleet denied reports that it had given Ukrainian forces in Crimea an ultimatum to surrender by early on Tuesday or face a military assault, Interfax news agency said after earlier reporting such a threat.
The State Department said that if true, an ultimatum would be a dangerous escalation of the crisis. The United States was likely to move down the path of imposing sanctions, it said.
Ukraine's acting president said Russia's military presence in Crimea was growing, without giving details, and Ukrainian officials said Russia was building up armoured vehicles on its side of a narrow stretch of water closest to Crimea after Putin declared at the weekend he had the right to invade his neighbour to protect Russian interests and citizens.
Both sides have so far avoided bloodshed, but the market turmoil highlighted damage the crisis could wreak on Russia's vulnerable economy, making it harder to balance the budget and potentially undermining business and public support for Putin.
Russian Deputy Economy Minister Andrei Klepach said market "hysteria" would subside but strains with Brussels and Washington - which has threatened visa bans, asset freezes and trade curbs - would continue to weigh on the economy.
On the ground in Perevalnoye, half way between the Crimean capital of Simferopol and the Black Sea, hundreds of Russian troops in trucks and armoured vehicles - without national insignia on their uniforms - were surrounding two military compounds, confining Ukrainian soldiers, who have refused to surrender, as virtual prisoners.
Ukraine called up reservists on Sunday after Putin's action provoked what British Foreign Secretary William Hague called "the biggest crisis in Europe in the twenty-first century".
At a meeting in Brussels, EU foreign ministers condemned Russia's military action and called for international mediation to avert further escalation. EU leaders will hold an emergency summit on Thursday to discuss how to help Ukraine.
An EU statement said that "in the absence of de-escalating steps by Russia", the 28-nation bloc would decide on steps such as suspending talks with Moscow on visa liberalisation.
OBSERVER MISSION
The Organization for Security and Cooperation in Europe (OSCE) said it was trying to convene an international contact group to help defuse the crisis after Germany said Chancellor Angela Merkel had convinced Putin to accept such an initiative.
Switzerland, which chairs the pan-European security body, said the group would support Ukraine during its transition and coordinate aid and could also discuss sending observers to monitor the rights of national minorities.
The United States urged Moscow to support sending OSCE observers to Ukraine to help defuse tension.
"There will be very, very broad consensus for that monitoring mission. We call on Russia to join that consensus, make the right choice and pull back its forces," U.S. Assistant Secretary of State Victoria Nuland told OSCE envoys in Vienna.
The Russian central bank raised its key lending rate by 1.5 percentage points after the rouble fell to all-time lows against the dollar. The MICEX index of Moscow stocks tumbled 11.5 percent to 1,278 points at 1400 GMT. That meant the market capitalisation of the rouble-denominated index had fallen $58.4 billion since Friday's close.
The east-west tension also knocked 2-3 percent off European stock markets and one percent off Wall Street, and sent safe haven gold to a four-month high.
Chicago wheat futures rose more than 5 percent and corn about 4 percent as tensions in Ukraine stoked fears of disruption to shipments from the Black Sea, one of the world's key grain-exporting zones.
Russian gas monopoly Gazprom, which supplies Europe through Ukraine, was down nearly 14 percent.
Gazprom's finance chief warned Ukraine that it may raise gas prices from next month, accusing Kiev of a patchy payments record, but said gas transit to Europe was normal. Ukraine has stocking up on gas imports in the last few days to beat a feared rise, a spokesman for its gas transit monopoly said.
Ukraine's Prime Minister Arseny Yatseniuk, head of a pro-Western government that took power when former president Viktor Yanukovich, a Russian ally, fled on February 21 after three months of street protests against his rule, said Putin had effectively declared war on his country.
Yatseniuk said the government planned to cut spending by 14 to 16 percent as Ukraine prepared for talks on Tuesday with the International Monetary Fund to avert the danger of default.
Western leaders have sent a barrage of warnings to Putin against armed action, threatening economic and diplomatic consequences, but are not considering a military response.
A Ukrainian border guard spokesman said Russian ships had been moving around the Crimean port city of Sevastopol, where the Russian Black Sea Fleet has a base, and Russian forces had blocked mobile telephone services in some parts of Crimea.
He said Moscow was building up its armour near a ferry port on Russia's side of the 4.5 km (three mile) wide Kerch Strait, which separates Crimea from Russia.
Russian Prime Minister Dmitry Medvedev issued an order on Monday to push ahead with a plan agreed with the previous Kiev government to build a bridge over the strait, which would be its first direct land link to Crimea bypassing Ukraine.
RUSSIAN FLAGS FLYING
Russian forces have seized Crimea - an isolated Black Sea peninsula with an ethnic Russian majority, where Moscow has a naval base - without firing a shot.
All eyes are now on whether Russia makes a military move in predominantly Russian-speaking eastern Ukraine, where pro-Moscow demonstrators have marched and raised Russian flags over public buildings in several cities in the last three days.
Pro-Russian protesters besieged lawmakers inside the regional government building in the eastern city of Donetsk, Yanukovich's hometown, on Monday in the latest such action.
Russia has staged war games with 150,000 troops along the land border, but so far they have not crossed. Kiev says Moscow is orchestrating the protests to justify a wider invasion.
Ukraine's security council has ordered the general staff to immediately put all armed forces on highest alert. However, Kiev's small and underequipped military is seen as no match for Russia's superpower might.
While the EU and NATO stepped up verbal pressure on Moscow, a German spokesman said Merkel believed it was not too late to resolve the Ukrainian crisis by political means despite differences of opinion between Putin and the West.
The German leader, who speaks fluent Russian, has had several long telephone calls with the German-speaking Putin since the crisis erupted with mass protests in Kiev, creating a major policy dilemma for Berlin, which is heavily dependent on Russian gas and has close economic ties.
"There is no doubt President Putin has a completely different view on the situation and events in Crimea from the German government and our Western partners," spokesman Steffen Seibert told reporters. But he added: "It is still not too late to resolve this crisis peacefully by political means."
So far, the Western response has been largely symbolic. Obama and others suspended preparations for a G8 summit in Sochi, where Putin has just finished staging his $50 billion winter Olympic games. Some countries recalled ambassadors.
On Kiev's Independence Square, known as the Maidan, where protesters manned barricades for three months to bring down Yanukovich, crowds were smaller than in the past few days as people returned to work.
"Crimea, we are with you!" read one placard. "Putin - Hitler of the 21st century," read another.
(Additional reporting by Peter Graff, Sabina Zawadzki, Pavel Polityuk, Natalia Zinets, Timothy Heritage and Stephen Grey in Kiev, Lina Kushch in Donetsk, Peter Apps in London, Steve Holland and Phil Stewart in Washington and Lou Charbonneau at the United Nations; writing by Paul Taylor; editing by Philippa Fletcher)
