Fears are growing that the confrontation on the EU's eastern borders could engulf the whole continent after Russia sent troops to back a new offensive by pro-Kremlin rebels in southeastern Ukraine.
EU President Herman Van Rompuy said the 28 leaders meeting in Brussels agreed to take "further significant steps" if Moscow did not back down.
The European Commission, the EU's executive arm, has been ordered to produce options for new sanctions within a week, he said.
"Everybody is fully aware that we have to act quickly given the evolution on the ground and the tragic loss of life of the last days," Van Rompuy told a news conference.
German Chancellor Angela Merkel said the new sanctions would build on existing measures against Russia which mainly cover financial services, armaments and energy.
British Prime Minister David Cameron said it was "totally unacceptable that there are Russian soldiers on Ukrainian soil."
Talking of a "deeply serious situation" he warned Russia that "if she carries on in this way the relationship between Europe and Russia, Britain and Russia, America and Russia will be radically different in the future."
Near point of no return
The sanctions plan came after Ukrainian President Petro Poroshenko visited Brussels to urge the EU to take tougher steps against Russia which he accused of "military aggression and terror."
"We are very close to the point of no return, the point of no return is full-scale war, which is already happening in the territories controlled by the separatists," he told a news conference.
"Today we are talking about the fate of Ukraine, tomorrow it could be for all Europe."
Lithuania's President Dalia Grybauskaite, whose Baltic nation is wary of a resurgent Russia on its own borders, gave a similar warning as she urged the EU to send military equipment to Kiev.
"Russia is practically in a state of war against Europe," she said.
The EU delivered a further riposte to Russia on Saturday when it appointed Polish Prime Minister Donald Tusk, a vocal Kremlin critic, to replace Van Rompuy as its next president.
The EU and the United States have already slapped tough sanctions on Russia for its role in the Ukraine crisis, including Moscow's annexation of Crimea in March.
Moscow has denied any troop presence in its western neighbour, despite the capture of paratroopers by Kiev and reports of secret military funerals being held in Russia.
But NATO said Thursday that Russia had sent at least 1,000 troops to fight alongside the insurgents, as well as air defence systems, artillery, tanks and armoured vehicles, and had massed 20,000 troops near the border.
Fresh rebel offensive, gains
The fresh rebel offensive has raised fears the Kremlin could be seeking to create a corridor between Russia and the strategic Black Sea peninsula of Crimea.
Ukraine has openly asked the EU for military help, and on Friday Kiev announced that it would also seek membership of the NATO alliance, a move sure to further enrage the Kremlin.
Poroshenko will travel to the NATO summit in Wales this week to meet US President Barack Obama and seek practical help from the Western alliance.
The sudden surge in tensions came only days after Poroshenko and Russian President Vladimir Putin held talks which failed to achieve any breakthrough.
Poroshenko said Saturday that fresh peace talks grouping representatives of Kiev, Moscow and the Organization for Security and Cooperation in Europe (OSCE) would take place in Minsk, the capital of Belarus, on Monday.
But on the ground there was no sign of a let up in the fighting, as the rebels vowed to launch a new military push.
Alexander Zakharchenko, the prime minister of the self-proclaimed Donetsk People's Republic, told Russian media on Saturday that rebels were "preparing a second large-scale offensive."
Kiev said Saturday that another air force plane had been shot down in the east, blaming it on a "Russian anti-aircraft system". Faced with the reinvigorated insurgent push that has dramatically turned the tide of the conflict, Ukrainian forces have been trapped in a string of towns in the southeast.
Kiev's contingents began a withdrawal from besieged positions near the transport hub of Ilovaysk, which lies east of the main rebel stronghold of Donetsk, after holding ground without reinforcements for 10 days.
In the Azov Sea port city of Mariupol to the south of Donetsk, citizens dug trenches as they geared up to defend the city from a feared rebel offensive from the east.