The United States and Europe Monday hit Russia with fresh sanctions for failing to stop soaring tensions in Ukraine, where a pro-Moscow mayor was shot and badly wounded and rebels seized another town.

As Western powers stepped up the pressure on Moscow over the worst East-West crisis since the Cold War, the White House imposed sanctions on seven Russian officials and 17 firms close to President Vladimir Putin.

The European Union said it was adding 15 names to its own list.

The US also warned it would target specific sectors of the Russian economy if the tens of thousands of troops the Kremlin has ordered to the border actually invade Ukraine.

But late Monday the Russian defence minister urged Washington to dial down the rhetoric and said Russian troops conducting "exercises" near the Ukrainian border had returned to their barracks.

On the sanctions, the Kremlin vowed there would be a "painful" response for Washington.

Russian Deputy Foreign Minister Sergei Ryabkov told the Interfax news agency that Moscow was "disgusted" by the US action, which he said showed Washington had "completely lost touch with reality".

The United States said it was prepared to "impose still greater costs" on Russia for what it called its "illegal intervention and provocative actions" in Ukraine.

Among those targeted was close Putin ally Igor Sechin, president and chairman of the board at Rosneft, Russia's top petroleum company and one of the world's largest publicly traded oil companies.

Washington is also tightening licensing requirements for certain high-tech exports to Russia that could have a military use.

The Western sanctions are a response to Russia's perceived failure to implement an April 17 deal struck in Geneva to defuse the crisis.

British Foreign Secretary William Hague, who plans to visit Ukraine as well as Moldova and Georgia next week, put the blame for the faltering Geneva deal on the Kremlin.

"Russia has so far failed to implement any part of the Geneva agreement," said Hague.

-- Invasion fears --

Western powers have feared that Russia could be planning an invasion of eastern Ukraine as it deployed some 40,000 troops to the border region, according to NATO.

But German Foreign Minister Frank-Walter Steinmeier said Monday "we do not have for the moment have any sign indicating that there is an imminent risk of a Russian invasion of Ukraine."

And Russian Defence Minister Sergei Shoigu assured his US counterpart Chuck Hagel in a phone call that Russian troops had returned to their barracks.

"Russia was forced to launch large-scale exercises near the border with Ukraine, facing the prospect of (Ukrainian) military action against civilians," Shoigu said, according to a defence ministry statement.

"Once the Ukrainian authorities declared that they would not use regular military units against the unarmed population, the Russian troops returned to barracks."

UN chief Ban Ki-moon Monday appealed to all sides to defuse the situation in Ukraine and restore "the spirit of compromise" shown at the Geneva talks.

"A diplomatic and political solution to this crisis is imperative and long overdue," said Ban's spokesman Stephane Dujarric.

As the sanctions lashed Russia, tensions on the ground in eastern Ukraine showed little sign of easing.

Pro-Moscow mayor Gennady Kernes, from the town of Kharkiv, was shot in the back Monday and remained in critical condition following surgery.

The identity and motive of the gunman who targeted him while he was riding his bicycle were unknown.

Also Monday Kalashnikov-toting militants seized the town hall of Kostyantynivka -- the latest of more than a dozen towns held by pro-Russian insurgents who were supposed to have disarmed under the Geneva deal.

Several people were wounded in Donetsk when pro-Russian militants wielding baseball bats and iron bars attacked a rally supporting the Western-backed authorities in Kiev, an AFP reporter on the scene said.

Earlier in Donetsk, some 300 masked men also using bats attacked a bank owned by a billionaire oligarch and regional governor who has clashed with Putin.

- Hostage crisis -

Meanwhile, negotiations were still under way to secure the release of seven remaining international observers from the OSCE, whose capture by rebels on Friday sparked global outrage.

The pan-European security organisation held an emergency meeting in Vienna to discuss the rising threat in Ukraine to monitors overseeing the faltering Geneva accord.

The current head of the Organisation for Security and Cooperation in Europe, Swiss President Didier Burkhalter, told AFP: "We don't want to stop, but it is our responsibility to assess the situation steadily.... If there is a change, then we will act."

The OSCE envoy from Russia, which blames Kiev for the detentions, said it was "extremely irresponsible" to send them to Slavyansk.

The self-styled mayor of Slavyansk, Vyacheslav Ponomaryov, said the rebels had given the OSCE negotiators a list of names of detained pro-Russian militants they would accept as part of a prisoner swap.

Chief among these was Pavel Gubarev, the self-proclaimed "people's governor" of Donetsk.

- 'Painful' response -

Moscow warned the new sanctions would lead "toward an escalation of the crisis".

"We will, of course, respond," Ryabkov said. "We are certain that this response will have a painful effect on Washington."

After a brief period of optimism prompted by the Geneva accord, the crisis has lurched into increasingly dangerous ground, with Ukraine's prime minister accusing Moscow of wanting to trigger a "third world war".

Ukraine's army is waging an offensive to quell the separatist movement in the eastern part of the country, which the West believes is fomented and controlled by the Kremlin.

Kiev's soldiers are surrounding the flashpoint town of Slavyansk in a bid to prevent reinforcements reaching militants there.

The crisis has escalated at breathtaking pace since November when pro-Western protesters in Kiev began mass demonstrations against Kremlin-backed then-president Viktor Yanukovych after he rejected an agreement to bring Ukraine closer to the European Union.

After four months of protests, which turned deadly as authorities tried to break them up, Yanukovych was forced from power.

In response, Moscow launched a blitz annexation of the peninsula of Crimea and stepped up troop movements on the border.

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