EU governments have agreed to impose sweeping sanctions on Russia, targeting state-owned banks, imposing an arms embargo and restricting sales of sensitive technology and the export of equipment for the country's oil industry, in response to Moscow's continued backing for separatists in eastern Ukraine.

The punitive measures, the most extensive EU sanctions imposed on Russia since the cold war, were agreed by ambassadors from the 28 member states after a seven-hour debate. They decided that Moscow had not fulfilled the conditions laid down by foreign ministers last week, to stop the supply of arms to the rebels and provide full cooperation in the investigation into the shooting down of Malaysia Airlines flight MH17.

US president Barack Obama joined the EU in sharply escalating economic pressure on Moscow.

He announced new measures, targeting major sectors of the Russian economy, including weapons, energy and finance. Three large banks – VTB Bank OAO, Bank of Moscow and the Russian Agricultural Bank – were cut off from the US economy.

"Today, Russia is once again isolating itself from the international community, setting back decades of genuine progress," the president said.

The EU sanctions will hit Russia the hardest. The bloc does 10 times more trade with it than the US.

The president of the European Council, Herman van Rompuy, and the head of the European Commission, José Manuel Barroso, issued a joint statement describing the EU measures as a strong warning that "Illegal annexation of territory and deliberate destabilisation of a neighbouring sovereign country could not be accepted in 21st-century Europe.

"When the violence created spirals out of control and leads to the killing of almost 300 innocent civilians in their flight from the Netherlands to Malaysia, the situation requires urgent and determined response," they said. "The European Union will fulfil its obligations to protect and ensure the security of its citizens. And the European Union will stand by its neighbours and partners."

Following a meeting of the emergency Cobra council of ministers on Tuesday, Downing Street said the UK will push for even harsher sanctions against Russia than the ones agreed by the EU if the country does not change course.

A No 10 spokesman said the UK expected the Netherlands to publish the preliminary findings of its investigation into the crash of MH17 next week. "In the Netherlands, the process for identifying and repatriating the victims continues and there are now 15 British police officers working as part of a 200-strong team to complete the process as swiftly as possible," she said.

"The prime minister underlined the need for a strong international response to Russia's ongoing efforts to destabilise Ukraine, noting that the EU should agree a package of sectoral sanctions today and that Europe must be willing to pursue further tough measures if Russia does not change course."

Later, David Cameron met some of those who lost loved ones in the MH17 disaster. "They discussed the repatriation process, the investigation and how to prevent such a tragedy from ever happening again," a spokesman said. "The prime minister … made it clear that the government was determined to do all it can to support them over the coming difficult months, from ensuring that their loved ones are brought home as soon as possible to bringing justice to those responsible for shooting down the passenger jet."

According to an EU official, the most important measure agreed was to deny Russian state-owned banks access to European capital markets. Under the agreed sanctions, Europeans will not be permitted to buy debt, equity or other financial instruments with a maturity higher than 90 days in Russian state-owned banks or their subsidiaries. Brokering or other services linked to any such transactions will also be banned. Any trade in arms and "related material" with Russia, both import and export, will be banned, but the embargo will apply to future contracts only, and therefore will not affect the €1.2bn sale of two French Mistral helicopter carrier ships already agreed. Russia imports relatively few arms from the EU, but sells Europe weapons worth more than €3bn.

Certain technology related to the energy industry will require specific prior authorisation, and export permits will not be given for exploration or production equipment for deep-water or Arctic drilling or for shale oil projects in Russia.

The measures do not affect the actual trading of oil, gas or other commodities.

Under the measures, equipment and technology on the EU list of dual-use items, with both civilian and military purposes cannot be sold to Russian companies involved in any way in the arms industry – an export trade estimated to be worth about €20bn.

The economic sanctions are due to take effect later this week and will be reviewed after three months.

Furthermore, another eight names of individuals and three entities will be added on Wednesday to the EU blacklist of Russians subject to asset freezes and travel bans. Four of the new individuals on the sanctions lists were described by an EU officials as "cronies" of President Putin, but the names have not yet been released.

"These are important sanctions because, for the past few years, Putin has being pursuing selective engagement with the west, saying, 'I don't need your lessons or your western norms but I do want the technology and knowhow from your companies,'" said Bobo Lo, an associate fellow at the Chatham House thinktank's Russia and Eurasia programme. "These sanctions challenge that approach."

"Access to credit is really important. In the 2009 financial crisis, when Russian companies couldn't raise money in Europe, they were forced to go cap in hand to China, and China extracted its pound of flesh. You could have similar scenarios now. Russia is more strategically dependent on China than at any time since the cold war. This will only accentuate that dependency."

Last year, nearly half the bonds issued by Russian state-run financial institutions were issued in the EU's financial markets. Although Russian banks could go elsewhere to raise funds, the added uncertainty will add to the country's borrowing costs.

In Washington, the White House welcomed the introduction of sectoral sanctions in Europe, a move it has been pushing for months, and indicated that the US would immediately follow the announcement with its own escalation in sanctions on Tuesday.

"The announcement that we anticipate later today from the Europeans is the culmination of months of diplomatic work that has been done by this administration," said Josh Earnest, the White House press secretary.

He said the White House expected the European punitive measures to "track pretty closely" with those introduced by the US two weeks ago, targeting the energy, defence and financial sectors. That US package, a significant escalation in the previous sanctions regime, was introduced the day before pro-Russia separatists were accused of shooting down flight MH17.

He said the downing of the Malaysian jet was a "head snapper" and changed the international community's stance toward Moscow. "It is certainly reasonable [to assert] the downing of this airliner contributed to the Europeans' willingness to step up to the plate and take the kind of serious action that this administration, and this country, put in place against Russia a few weeks ago," he said.

Earnest added that the US would make its own announcement about sanctions "as soon as today".