Leaders of the Group of Seven major economies agreed to impose more sanctions on Russia over the crisis in Ukraine, where armed pro-Moscow separatists have detained a group of international observers they accuse of being Nato spies.

The pro-Western Kiev government said a Russian special forces operative was behind what it called a kidnapping in the eastern city of Slaviansk that is under the separatists' control, and said the detainees were being used as a "human shield".

Ukraine's state security service said the observers for the Organization for Security and Cooperation in Europe (OSCE) were being held "in inhuman conditions in the basement of the terrorists' headquarters," and that one needed medical help.

"Russian authorities never condemned these terrorists and this is the clear sign that the Russian regime supports these gangsters," Ukrainian Prime Minister Arseny Yatseniuk said.

Russia denies it is to blame for the crisis in eastern Ukraine, where armed pro-Russian separatists have taken control of about a dozen official buildings.

The Russian foreign ministry said it was working to resolve the observer crisis, which it blamed on Kiev for failing to ensure the mission's safety in "areas where the authorities do not control the situation and where a military operation against residents of their own country has been unleashed".

The observers, including nationals from Germany, Sweden, Denmark, Poland and the Czech Republic, along with several Ukrainian army officers accompanying them on the German-led monitoring mission, were seized on Friday.

Russia's envoy to the Vienna-based OSCE said Moscow would take all steps to free them, Russian media reported.

The separatists invited Russian journalists on Saturday into a local security building they have seized and showed military identification cards they said proved the detainees were spying for Nato, according to reports in Russian media.

It is standard practice for serving military officers to be seconded to OSCE missions.

U.S. TROOPS

One of the separatists, Yevgeny Gorbik, told reporters: "We are urgently checking their activities, where they were and what they were doing."

Asked what would happen to the detainees, he said: "I don't know. It's not up to me to decide. Those at the top will decide."

German Defence Minister Ursula von der Leyen said: "I urge everyone with responsibility and influence in Ukraine and Russia to urgently do everything and use all their influence to ensure the observers are released immediately and safely."

German Foreign Minister Frank-Walter Steinmeier discussed the Ukraine situation with his Russian counterpart Sergei Lavrov by telephone on Saturday "with an accent on possible steps to de-escalate the situation," the Russian ministry said.

The OSCE has dispatched a negotiating team to the region to try to secure the observers' release, a German government source said.

The Ukraine crisis has brought relations between Russia and the West to their lowest ebb since the Cold War, and is increasingly turning into a military stand-off.

Russia has massed troops and helicopters on the border with Ukraine, while Nato has deployed extra forces in eastern Europe, saying they are needed to reassure its allies.

Yatseniuk said Russian military aircraft entered Ukrainian airspace seven times overnight.

"The only reason is to provoke Ukraine ... and to accuse Ukraine of waging war against Russia," the prime minister told reporters before cutting short a visit to Rome.

Washington deployed 150 paratroopers to Lithuania on Saturday. A total of 600 U.S. troops have now arrived in Poland and the former Soviet Baltic states.

"As threats emerged, we see who our real friends are," Lithuanian President Dalia Grybauskaite said as she greeted the troops at the Siauliai air base.

Without mentioning Russia, she said the presence of U.S. troops would "repel those who encroach on stability in Europe and peace in the region".

"The numbers are not important. If just one of our guests is harmed, this would mean an open confrontation, not with Lithuania but with the United States of America."

"DOOR REMAINS OPEN"

U.S. officials said new sanctions targeting "cronies" of President Vladimir Putin could be unveiled as early as Monday unless Russia moved fast to defuse the crisis.

In a joint statement, G7 leaders said Russia had not taken any concrete steps to implement an accord, signed in Geneva, intended to rein in illegal armed groups.

"Instead, it has continued to escalate tensions by increasingly concerning rhetoric and ongoing threatening military manoeuvres on Ukraine's border," it said.

"We have now agreed that we will move swiftly to impose additional sanctions on Russia."

But it added: "We underscore that the door remains open to a diplomatic resolution of this crisis."

The European Union will name 15 more Russians subject to asset freezes and a travel ban on Monday and senior EU diplomats will meet the same day to discuss the next steps, EU sources said.

Putin acknowledged for the first time this week that sanctions were causing difficulties for Russia, though he said the impact was not "critical".

Standard & Poor's cut Russia's sovereign long-term debt rating on Friday, making it more expensive for the government to borrow money. That forced the central bank to raise its key interest rate to limit a fall in the rouble.

Russian banks have been moving funds out of foreign accounts in anticipation of sanctions.

Russia has threatened to cut off gas to Ukraine, which would have a knock-on effect on customers further west because many pipelines transit the country. Officials from the EU and Ukraine met in Kiev on Saturday to discuss technical ways to reduce the impact of a cut-off. – Reuters