By Lidia Kelly and Alissa de Carbonnel
MOSCOW/PEREVALNOYE, Ukraine (Reuters) - Russia paid a financial price on Monday for its military intervention in neighbouring Ukraine, with stocks, bonds and the rouble plunging as President Vladimir Putin's forces tightened their grip on the Russian-speaking Crimea region.
The Moscow stock market fell by 11.3 percent, wiping nearly $60 billion off the value of Russian companies in a day, and the central bank spent $10 billion of its reserves to prop up the rouble as investors took fright at escalating tensions with the West over the former Soviet republic.
Ukraine said Russia was building up armoured vehicles on its side of a narrow stretch of water closest to Crimea after Putin declared at the weekend he had the right to invade his neighbour to protect Russian interests and citizens.
Both sides have so far avoided bloodshed, but the market rout highlighted the damage the crisis could wreak on Russia's sluggish economy, making it harder to balance the budget and potentially undermining business and public support for Putin.
Russian Deputy Economy Minister Andrei Klepach said market "hysteria" would subside but strains with Brussels and Washington - which has threatened visa bans, asset freezes and trade curbs - would continue to weigh on the economy.
On the ground in Perevalnoye, half way between the Crimean capital of Simferopol and the Black Sea, hundreds of Russian troops in trucks and armoured vehicles - without national insignia on their uniforms - surrounded two military compounds, confining Ukrainian soldiers, who have refused to surrender, as virtual prisoners.
Ukraine called up reservists on Sunday and Washington threatened to isolate Russia economically after Putin's action provoked what Britain's foreign minister called "the biggest crisis in Europe in the twenty-first century".
European Union foreign ministers began emergency talks on Ukraine but diplomats said they would press for mediation to prevent escalation and hold in reserve the possibility of sanctions against Moscow.
The Organisation for Security and Cooperation in Europe (OSCE) said it was trying to convene an international contact group to help defuse the crisis after Germany said Chancellor Angela Merkel had convinced Putin to accept such an initiative.
Switzerland, which chairs the pan-European security body, said the contact group would support Ukraine during its transition and coordinate aid and could also discuss sending observers to monitor the rights of national minorities.
The United States urged Moscow to support sending OSCE observers to Ukraine to help defuse tension.
"There will be very, very broad consensus for that monitoring mission. We call on Russia to join that consensus, make the right choice and pull back its forces," U.S. Assistant Secretary of State Victoria Nuland told OSCE envoys in Vienna.
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Graphic on Crimea crisis http://link.reuters.com/suh37v
Ukraine's ethnic divide http://link.reuters.com/dag37v
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MARKETS TUMBLE, GAZPROM HIT
The Russian central bank raised its key lending rate by 1.5 percentage points after the rouble fell to all-time lows against the dollar. The MICEX index <.MCX> of Moscow stocks tumbled 11.5 percent to 1,278 points at 1400 GMT. That meant the market capitalisation of the rouble-denominated index had fallen $58.4 billion since Friday's close.
The east-west tension also knocked 2-3 percent off European stock markets and sent safe haven gold to a four-month high.
Russian gas monopoly Gazprom
Gazprom's finance chief warned Ukraine that it may hike gas prices from next month, accusing Kiev of a patchy payments record, but said gas transit to Europe was normal. Ukraine has increased gas imports in the last few days to beat a feared price rise, a spokesman for its gas transit monopoly said.
Ukraine's Prime Minister Arseny Yatseniuk, head of a pro-Western government that took power when former president Viktor Yanukovich, a Russian ally, fled on February 21 after three months of street protests against his rule, said Putin had effectively declared war on his country.
Yatseniuk said the government planned to slash spending by 14 to 16 percent as Ukraine prepares for talks with the International Monetary Fund to avert the danger of default.
Western leaders have sent a barrage of warnings to Putin against armed action, threatening economic and diplomatic consequences if Moscow goes further, but are not considering a military response.
A Ukrainian border guard spokesman said Russian ships had been moving around the Crimean port city of Sevastopol, where the Russian Black Sea Fleet has a base, and Russian forces had blocked mobile telephone services in some parts of Crimea.
He said Moscow was building up its armour near a ferry port on Russia's side of the 4.5 km (three mile) wide Kerch Strait, which separates Crimea from Russia.
"There are armoured vehicles on the other side of the strait. We can't predict whether or not they will put any vehicles on the ferry," the spokesman said by telephone.
Russian Prime Minister Dmitry Medvedev issued an order on Monday to push ahead with a plan agreed with the previous Kiev government to build a bridge over the strait, which would be its first direct land link to Crimea bypassing Ukraine.
RUSSIAN FLAGS FLYING
Russian forces have seized Crimea - an isolated Black Sea peninsula with an ethnic Russian majority, where Moscow has a naval base - without firing a shot.
On Sunday they surrounded several small Ukrainian military outposts there and demanded the Ukrainian troops disarm. Some refused, leading to stand-offs, but no fighting.
All eyes are now on whether Russia makes a military move in predominantly Russian-speaking eastern Ukraine, where pro-Moscow demonstrators have marched and raised Russian flags over public buildings in several cities in the last three days.
Pro-Russian protesters occupied the first floor of the regional government building in the eastern city of Donetsk, Yanukovich's hometown, on Monday in the lastest such action.
Russia has staged war games with 150,000 troops along the land border, but so far they have not crossed. Kiev says Moscow is orchestrating the protests to justify a wider invasion.
Ukraine's security council has ordered the general staff to immediately put all armed forces on highest alert. However, Kiev's small and underequipped military is seen as no match for Russia's superpower might.
While the EU and NATO stepped up verbal pressure on Moscow, a German spokesman said Merkel believed it was not too late to resolve the Ukrainian crisis by political means despite differences of opinion between Putin and the West.
The German leader, who speaks fluent Russian, has had several long telephone calls with the German-speaking Putin since the crisis erupted with mass protests in Kiev, creating a major policy dilemma for Berlin which is heavily dependent on Russian gas and has close economic ties.
"There is no doubt President Putin has a completely different view on the situation and events in Crimea from the German government and our Western partners," spokesman Steffen Seibert told reporters. But he added: "It is still not too late to resolve this crisis peacefully by political means."
So far, the Western response has been largely symbolic. Obama and others suspended preparations for a G8 summit in Sochi, where Putin has just finished staging his $50 billion winter Olympic games. Some countries recalled ambassadors.
On Kiev's Independence Square, known as the Maidan, where protesters manned barricades for three months to bring down Yanukovich, the morning crowds were smaller than in the past few days as people returned to work.
"Crimea, we are with you!" read one placard. "Putin - Hitler of the 21st century," read another.
Sergei Lavreynenko, 44, a librarian from Kiev, said Ukrainians were ready to take up arms to defend the country, and were frustrated at mixed messages from the authorities.
"Of course we are all ready to go," he said next to a display of homemade mortar tubes and molotov cocktails used in the uprising against Yanukovich. "We have all served in the military. We have military specialisms. If we can build our own mortar tube like that, we can do even better.... But it needs to be organised. You can't just get a bunch of guys, grab sticks and clubs and race off to Crimea."
Britain's International Institute for Strategic Studies estimates Kiev has fewer than 130,000 troops under arms, with few planes fit to fly and few spare parts for a lone submarine.
Russia, by contrast, has spent billions under Putin to upgrade and modernise the capabilities of forces that were dilapidated after the breakup of the Soviet Union. Moscow's special units are now seen as equals of the best in the world.
(Additional reporting by Peter Graff, Sabina Zawadzki, Pavel Polityuk, Natalia Zinets, Timothy Heritage and Stephen Grey in Kiev, Lina Kushch in Donetsk, Peter Apps in London, Steve Holland and Phil Stewart in Washington and Lou Charbonneau at the United Nations; writing by Paul Taylor; editing by Philippa Fletcher)
