By Luke Baker and Robin Emmott
BRUSSELS (Reuters) - Germany's Angela Merkel urged Russian President Vladimir Putin on Wednesday to help stem violence in eastern Ukraine and said the West would not hesitate to impose stricter economic sanctions on Russia if it failed to cooperate.
Speaking ahead of a summit of the Group of Seven major industrialized nations, a meeting Russia was supposed to host but has been pointedly excluded from because of its seizure of Crimea, Merkel presented Putin with a straight choice.
"It is decisive that President Putin use his influence to get the separatists to refrain from violence and intimidation, hand over their weapons and stop the occupations," she told the German parliament, referring to Russia-allied separatists.
"If this doesn't happen ... we won't shrink from imposing further sanctions."
The United States and European Union have imposed travel bans and asset freezes on dozens of Russian and Crimean officials since the annexation of the Ukrainian peninsula in March, but have not yet moved to more severe economic sanctions.
Those were threatened if Russia took further steps to destabilize Ukraine. With elections having gone smoothly, and new President Petro Poroshenko in office, some have concluded that Putin has stepped back from the brink.
Tensions on Europe's eastern frontier will be the focus of discussion among G7 leaders over dinner on Wednesday, including how best to support Poroshenko and Ukraine's shattered economy.
The threat of imposing further costs on Russia if necessary will be kept on the table.
Ahead of the summit - the first without Russia since it joined the G7 club in 1997 - officials said they were watching Moscow's behavior closely and were not yet ready to conclude that Russia was playing a more cooperative role.
"It is up to Russia to behave in line with international law and the values that are G8 values," said one European official when asked if Russia, a critical economic and energy partner for Europe, could rejoin the G8 at some point soon.
"It's a bit early at this stage, but I wouldn't rule out the heads of state discussing how they see the future of the G7 or the G8," the official said.
Russia denies it is behind the revolt in eastern Ukraine, where militias allied to Moscow have seized buildings, attacked Ukrainian troops and declared independence. Putin has also defended his right to protect Russian-speaking people.
President Barack Obama met with Poroshenko in Warsaw ahead of the summit and praised the billionaire chocolate industrialist as a "wise choice" to lead the country through its worst crisis since independence.
"What Ukrainians said in the elections is that they reject that path, they reject violence," Obama told reporters.
"That's the hope that President Poroshenko represents."
ECONOMICS AND TRADE
As well as foreign policy, the two-day summit will cover economic, trade, climate and energy policy.
One of the most sensitive discussions will be over energy security, particularly in Europe, which relies on Russia for around a third of its oil and gas - a fact that gives Moscow leverage over the EU and its 500 million people.
European leaders have committed themselves to diversifying away from Russia but doing so will take time and be costly, and may in part depend on the willingness of the United States to supply liquefied natural gas to Europe.
"The use of energy supplies as a means of political coercion or as a threat to security is unacceptable," G7 leaders will say, according to a draft communique seen by Reuters.
"The crisis in Ukraine makes plain that energy security must be at the center of our collective agenda and requires a step-change to our approach to diversifying energy supplies."
The economic discussion is not expected to break new ground, instead reiterating that all the G7 members - the United States, Canada, Germany, France, Britain, Japan and Italy - must focus on sustaining economic recovery and tightening regulations to prevent future banking sector problems.
"We will take further steps to support strong, sustainable and balanced growth, with a common goal of increasing the resilience of our economies," the draft communique said.
"We agreed that 2014 will be the year in which we focus on substantially completing key aspects of the core financial reforms that we undertook in response to the global financial crisis," including ending "too-big-to-fail" banking.
(Additional reporting by Jan Strupczewski and Barbara Lewis in Brussels, Noah Barkin and Stephen Brown in Berlin. Editing by Mike Peacock)