Hesitant European leaders on Wednesday launch a fresh debate on adopting new sanctions against Russia for its perceived backing of Ukrainian insurgents that could damage their own fragile economies.
The Brussels discussions come as three months of fighting that has already claimed more than 600 lives threatens to spill into all-out civil war with potential repercussions for neighbouring European nations.
Nearly 50 civilians have died in artillery and air strikes across the Russian-speaking eastern regions of Donetsk and Lugansk since the weekend that both sides blame on each other.
At least 11 civilians were killed on Tuesday morning alone when their apartment bloc crumbled after being hit by an apparent air strike in the rebel-controlled southeastern town of Snizhne.
Ukraine called the incident a "provocation" by the separatists aimed at making it look like the new pro-Western leaders in Kiev were bombing ethnic Russians who cherish their Soviet-era ties with Moscow.
Kiev has also warned that Russia had parked thousands of troops along its entire border with Ukraine in preparation for a possible invasion.
And Washington has issued increasingly transparent hints that it was growing impatient with the European Union's cautious approach and preparing to adopt punitive steps against Russia's defence and financial sectors on its own.
Ukrainian foreign ministry spokesman Vasyl Zvarych argued on Tuesday that "vast proof of Russia's involvement in the rebels' actions provide further grounds for adopting tougher sanctions -- a third level of sanctions aimed at countering Russia's aggression."
But EU diplomats have previously said they were only ready to expand targeted measures against Russians and pro-Kremlin Ukrainians held responsible for the bloody uprising and Moscow's earlier annexation of Crimea.
The list now includes 61 names and has been brushed aside as meaningless by the Kremlin.
Diplomatic sources said EU leaders were also considering halting or curbing funding for new projects in Russia provided through the London-based European Bank for Reconstruction and Development (EBRD) and the EU's European Investment Bank (EIB).
But most analysts agree that the European Council -- concerned about its member states' strong dependence on Russian gas -- will steer clear of the "third phase" sanctions impacting entire sectors of its economy.
"Fully-fledged sector sanctions... remain a distant risk, notwithstanding the latest rhetoric," Moscow's VTB Capital investment bank told its clients on Wednesday. "Even the aggressive stance of the US seemingly presupposes targeting a collection of specific entities," it wrote in a research note.
Failed Skype talks
Germany and France have been spearheading European efforts to revive a failed truce in Ukraine that would lead to peace negotiations and take some pressure off the bloc to punish Russia.
But Ukrainian President Petro Poroshenko's attempts to set up a Skype videoconference on Tuesday with the separatists -- a conciliatory step previously agreed with Germany Chancellor Angela Merkel -- were rebuffed by the rebel command.
The indirect Contact Group talks are being mediated by the Organisation for Security and Cooperation in Europe (OSCE) and have seen Kiev represented by former president Leonid Kuchma.
Poroshenko's office said two attempts to set up the conference on Tuesday collapsed.
"This indicates a lack of willingness on the side of the separatists to engage in substantive talks on a mutually agreed ceasefire," the OSCE said in a statement issued late Tuesday.
US assures Ukraine
US allies and Washington would prefer to move in coordination with Europe on measures that could target sectors of the Russian economy and defence industry -- a step that would likely be most effective.
The White House said US Vice President Joe Biden on Tuesday "told President Poroshenko that the United States was engaging with European leaders to discuss the imposition of costs on Russia for its continued escalation of the conflict."
Poroshenko's office said Merkel had also assured the embattled Ukrainian leader on Tuesday that "Ukraine will receive the European Council's support".
The Kiev statement added that "Poroshenko assured Angela Merkel that he is a proponent of a peaceful settlement" to Ukraine's worst crisis since its independence in 1991.