Accusing Russia of "exploiting a phase of uncertainty" in Ukraine, German Chancellor Angela Merkel has warned that Moscow would risk "massive" political and economic damage if it refused to change course on Crimea.
Merkel's comments came as tension mounted ahead of Sunday's referendum in Ukraine's autonomous Black Sea peninsula on whether to join the Russian Federation.
"An annexation of Crimea and a destabilisation of eastern Ukraine would not only change the relationship between the EU and Russia, but Russia would also be damaging itself massively in both economic and political terms," Merkel said.
Merkel called upon Russia to show its willingness for a diplomatic solution by agreeing to create an international "contact group" or an observer mission.
The territorial integrity of Ukraine is non-negotiable and this must be the basis for any efforts to resolve the crisis, she said.
The chancellor referred to the decision taken by the EU leaders at their summit in Brussels last Thursday to impose a set of sanctions against Russia in three stages.
In the first phase, negotiations with Russia on easing visa restrictions and on a new agreement concerning the basis of EU-Russia cooperation were suspended.
If Russia refuses to cooperate in the efforts to resolve the conflict peacefully, the EU foreign ministers will decide next Monday to impose the second stage of the sanctions, Merkel said.
They will include travel ban into the EU for those responsible for the crisis in Ukraine, freezing of accounts and cancelling the next EU-Russia summit.
She also warned that if Russia continues to destabilise the situation in Ukraine and if there are "worrying developments" in the eastern region close to the Russian border, the third stage of the sanctions will come into force.
They will have far-reaching consequences for the economic cooperation between the EU and Russia, she said.
However, Merkel rejected a military confrontation over Crimea
"This conflict cannot resolved using military means," she said in a policy statement to the Bundestag, the lower house of parliament yesterday at the start of a debate on the crisis in Ukraine.
"Military action is not an option," she told the lawmakers. The chancellor accused Russia of "exploiting a phase of uncertainty" in Ukraine. With its intervention in Crimea, Russia is openly questioning the territorial integrity of Ukraine.
"The law of the jungle, the principle that might is right is taking precedence over the strength of the law, unilateral geopolitical interests are taking precedence over mutual understanding and cooperation," she said.