The United States and its European allies are set to announce fresh sanctions against Russia on Tuesday (today) after President Vladimir Putin recognised two breakaway regions in eastern Ukraine, deepening Western fears of a new war in Europe.

The Ukrainian military said two soldiers were killed and 12 wounded in shelling by pro-Russian separatists in the east in the past 24 hours, the most casualties this year, as ceasefire violations increased.

Putin's announcement on Monday, and his signing of a decree on the deployment of Russian troops to the two breakaway regions, drew international condemnation and immediate US sanctions, with President Joe Biden signing an executive order to halt US business activity in the breakaway regions.

Rising fears of war pushed oil prices to a seven-year high on Tuesday, while safe-havens currencies including the yen rallied and global stocks tumbled.

"The United States will impose sanctions on Russia for this clear violation of international law and Ukraine sovereignty and territorial integrity," Linda Thomas-Greenfield, US ambassador to the United Nations, told reporters after an emergency meeting of the Security Council late on Monday.

"We can, will, and must stand united in our calls for Russia to withdraw its forces, return to the diplomatic table and work toward peace."

But a senior US official said the deployment of Russian troops to the breakaway regions did not merit the harshest sanctions the United States and its allies had prepared in the event of a full-scale invasion, as Russia already had troops there.

A senior British government minister said it was clear Putin had chosen confrontation over dialogue and Britain would respond with sanctions.

"You can conclude that the invasion of Ukraine has begun," Health Secretary Sajid Javid said.

He said the situation was as grave as the 1962 Cuban missile crisis when a confrontation between the United States and the Soviet Union brought the world to the brink of nuclear war.

Russia has denied planning to attack its neighbour but it has massed troops on Ukraine's borders and threatened "military-technical" action unless it receives sweeping security guarantees, including that Ukraine will never join NATO.

Russian foreign ministry spokeswoman Maria Zakharova said the recognition of the two regions did not affect Russia's readiness for talks with the United States, the Tass news agency reported.

West considers how to act

Britain said it had drawn up sanctions to target those complicit in the violation of Ukraine’s territorial integrity, and those measures would come into force on Tuesday.

European Union member states' ambassadors will meet to discuss possible sanctions with limited sanctions a possible option, an EU official said.

An EU diplomat said separately the meeting would consider how to act on a statement made by EU leaders on Monday that the bloc would "react with sanctions against those involved in this illegal act".

China said it was concerned about the worsening situation and called for all parties to exercise restraint while Japan said it was ready to join international sanctions on Moscow in the event of a full-scale invasion.

Vassily Nebenzia, Russia's ambassador to the United Nations, warned Western powers to "think twice" and not worsen the situation.

A Reuters witness saw tanks and other military hardware moving through the separatist-controlled city of Donetsk. No insignia were visible on the vehicles.

Ukraine's military said on its Facebook page it had recorded 84 cases of shelling by separatists who it said had opened fire on about 40 settlements along the front line with heavy artillery, in breach of ceasefire agreements.

The Interfax news agency cited a separatist official as saying Ukrainian saboteurs detonated a mine on a road killing three civilians.

Grievances

Russian-backed separatists in Ukraine's Donetsk and Luhansk regions - collectively known as the Donbass - broke away from Ukrainian government control in 2014 and proclaimed themselves independent "people's republics".

Russia needed to ratify its friendship treaties with the regions before it could discuss matters like the exact borders of the territories, RIA news agency reported, citing the foreign ministry. Russia's parliament is expected to review friendship treaties on Tuesday.

In a lengthy televised address on Monday packed with grievances against the West, a visibly angry Putin said eastern Ukraine was ancient Russian land.

Putin delved into history as far back as the Ottoman empire and expressed frustration that Russia's demands for a rewriting of Europe's security arrangements had been repeatedly rebuffed.

"I deem it necessary to make a decision that should have been made a long time ago - to immediately recognise the independence and sovereignty of the Donetsk People's Republic and the Lugansk People's Republic," Putin said.

Putin has for years worked to restore Russia's influence over nations that emerged after the collapse of the Soviet Union, with Ukraine holding an important place in his ambitions. Russia annexed Crimea from Ukraine in 2014, and Western countries imposed sanctions on Russia.

The rouble extended its losses as Putin spoke, at one point sliding beyond 80 per dollar.

A French presidential official said the speech "mixed various considerations of a rigid and paranoid nature".

Russia's Lavrov brushes off Western sanctions

Russian Foreign Minister Sergei Lavrov brushed off the threat of sanctions on Tuesday, saying the West would impose them regardless of events and describing the response to Russia's recognition of two breakaway Ukrainian regions as predictable.

"Our European, American, British colleagues will not stop and will not calm down until they have exhausted all their possibilities for the so-called ‘punishment of Russia’. They are already threatening us with all manner of sanctions or, as they say now, 'the mother of all sanctions'," Lavrov said.

"Well, we're used to it. We know that sanctions will be imposed anyway, in any case. With or without reason."