Vladimir Putin has lost the plot over Ukraine, according to the German chancellor, Angela Merkel.

US reports said Merkel phoned Barack Obama on Sunday evening after speaking to the Russian president to press him to back down from his invasion of Ukraine and occupation of the Crimean peninsula.

"She was not sure he was in touch with reality, people briefed on the call said. 'In another world,' she said," the New York Times reported.

The vast gap between Putin's and the west's perceptions of what is taking place in Ukraine is adding to the pressure on the White House to take the lead in what US experts are calling the defining international crisis of Barack Obama's two terms. Senior US administration officials concede that Putin has taken total control of Crimea.

EU foreign ministers gather in Brussels for an emergency meeting on Monday. Nato, also in Brussels, is expected to issue a damning statement on Russia. But the Europeans and the Americans already appear divided and there are also splits among European allies, encouraging the Kremlin to believe that the response from the west will be less than overwhelming.

While Washington is threatening to kick Russia out of the G8 group of leading world economies, Berlin is opposed to this move. The EU foreign ministers are unlikely to get very far in agreeing on economic sanctions against Russia, while John Kerry, the US secretary of state, has spoken of a punitive package aimed at Russia's economic isolation.

Kerry is expected in Kiev on Monday where the foreign secretary, William Hague, described Ukraine as "certainly the biggest crisis in Europe in the 21st century".

Speaking to the BBC from Kiev, Hague said Russia could face "significant diplomatic and economic costs" unless it stops threatening the integrity and sovereignty of Ukraine. Putin needs to return his forces to their barracks in Crimea, he added.

He also urged Russia and Ukraine to start a direct dialogue. Similar calls have come from Washington and it may be that the EU meeting offers to mediate between the two sides, although Putin will be wary of Europe playing the peacebroker, as it has been an integral factor in the conflict since the Ukrainian crisis erupted in November when the toppled president Viktor Yanukovych ditched trade and political pacts with Brussels.

Merkel suggested to Putin that the EU send a fact-finding mission to Ukraine. The Organisation for Security and Co-operation in Europe, which was also meeting to discuss Ukraine on Monday in Vienna, could also be charged with the mission, diplomats said.

Hague, who had been meeting Ukrainian leaders in an act of solidarity before attending a meeting of EU foreign ministers in Brussels, urged restraint on all sides, saying there were constant risks of miscalculation or a flashpoint. He commended the Ukrainian authorities for "refusing to rise to provocation" and urged them "to stick to that course".

Hague was reluctant to detail the economic sanctions Russia may face, but diplomatic sources pointed out that the Russian economy is more integrated with the west than during the cold war and may suffer reverses on the Russian stock exchange.

Russian shares were tumbling in Moscow by more than 11% at the time Hague was meeting the new Ukrainian leadership in Kiev. He stressed he could not foresee a satisfactory outcome that left Crimea annexed once again by Russia.

He added: "Be in no doubt, there will be consequences. The world cannot say it is OK to violate the sovereignty of other nations." The costs would be imposed unless the Russians respect the sovereignty of Ukraine, he said.

"This clearly is a violation of the sovereignty, independence and territorial integrity of Ukraine. If Russia continues on this course we have to be clear this is not an acceptable way to conduct international relations."

Sanctions on Russia could rebound on Europe in a tit-for-tat contest. Russia is a big export market for the EU, which is also highly dependent on Russian energy exports, with about a quarter of its oil and gas originating in Siberia.

Hague denied that western condemnation of the Russian invasion of Ukraine was weakened by the allied invasion of Iraq in 2003, saying Ukraine had never represented a threat to Russia or any other nation. Hague claimed the truth was that Putin had "suffered a major diplomatic reverse and was reacting to that".

He suggested the temporary suspension of preparations for the G8 summit due to be hosted by Putin in Sochi in June might become permanent, although the Germans are reluctant to close down one of the chief avenues of dialogue between Russia and the west.

Hague said the G7 – the main western economies – were entirely capable of co-operating among themselves without Russia and would move speedily in that direction if this crisis could not be resolved.

Hague acknowledged the relationship between Ukraine and Russia, but said that at the same time the country could have closer links than at present with the EU.