European Union leaders have given Russia a week to reverse course in Ukraine or face a new round of sanctions as Kiev warns it is on the brink of full-scale war with Moscow.

Fears are growing that the confrontation on the EU's eastern borders could engulf the whole continent after Russia sent troops to back a new offensive by pro-Kremlin rebels in south-east Ukraine.

The EU president, Herman Van Rompuy, said the 28 leaders meeting in Brussels had agreed to take "further significant steps" if Moscow did not back down.

He said the European commission had been ordered to produce options for fresh sanctions within a week. "Everybody is fully aware that we have to act quickly given the evolution on the ground and the tragic loss of life of the last days," Van Rompuy told a news conference.

Angela Merkel, the German chancellor, said the new sanctions would build on existing measures against Russia.

Senior diplomats confirmed the punitive measures were not so much new as a tightening of the restrictions imposed in July on the financial, energy, and defence sectors in Russia. "It's about closing loopholes," said a diplomat. They warned, however, that it could be weeks before any new sanctions were applied, perhaps as late as October.

David Cameron said it was "totally unacceptable that there are Russian soldiers on Ukrainian soil". Talking of a "deeply serious situation", the UK prime minister said: "If [Russia] carries on in this way, the relationship between Europe and Russia, Britain and Russia, America and Russia will be radically different in the future."

In comments recorded on Friday but broadcast on Saturday, Vladimir Putin did not directly address sanctions but blamed the crisis in Ukraine on the west, accusing it of supporting a "coup" against pro-Kremlin president Viktor Yanukovych in February.

"They should have known that Russia cannot stand aside when people are being shot almost at point-blank range," said the Russian president, adding that he did not have in mind "the Russian state but the Russian people".

Putin called for immediate talks on the future of east Ukraine, saying for the first time that "statehood" should be considered for the region.

"We need to immediately begin substantive talks … on questions of the political organisation of society and statehood in south-eastern Ukraine with the goal of protecting the lawful interests of the people who live there," Putin was quoted as saying by Russian news agencies on the TV show broadcast in the far east of the country.

Russia has previously only called for greater rights under a decentralised federal system to be accorded to the eastern regions of Ukraine, where predominantly Russian-speakers live.

The EU's stepped-up sanctions plan came after the Ukrainian president, Petro Poroshenko, visited Brussels to urge the EU to take tougher steps against Russia, which he accused of "military aggression and terror".

"We are very close to the point of no return, the point of no return is full-scale war, which is already happening in the territories controlled by the separatists," he told a news conference. "Today we are talking about the fate of Ukraine, tomorrow it could be for all Europe."

Lithuania's president, Dalia Grybauskaite, whose country is wary of a resurgent Russia on its own borders, gave a similar warning as she urged the EU to send military equipment to Kiev. "Russia is practically in a state of war against Europe," she said.

The EU delivered a further riposte to Russia on Saturday when it appointed the Polish prime minister, Donald Tusk, a vocal Kremlin critic, to replace Van Rompuy as its next president. The EU and the US have already slapped tough sanctions on Russia for its role in the Ukraine crisis, including Moscow's annexation of Crimea in March.

Moscow has denied any troop presence in its western neighbour, despite the capture of paratroopers by Kiev and reports of secret military funerals being held in Russia. But Nato claimed on Thursday that Russia had sent at least 1,000 troops to fight alongside the insurgents, as well as air defence systems, artillery, tanks and armoured vehicles, and had massed 20,000 troops near the border.

The fresh rebel offensive has raised fears that the Kremlin could be seeking to create a corridor between Russia and the Black Sea peninsula of Crimea.

Ukraine has openly asked the EU for military help, and on Friday Kiev announced that it would also seek membership of Nato, a move sure to further enrage the Kremlin.

Poroshenko will travel to the Nato summit in Wales this week to meet the US president, Barack Obama, and seek practical help from the western alliance.

Poroshenko said on Saturday that fresh peace talks grouping representatives of Kiev, Moscow and the Organisation for Security and Cooperation in Europe (OSCE) would take place in Minsk, the capital of Belarus, on Monday.

In Ukraine, there was no sign of a let-up in the fighting, as the rebels vowed to launch a new military push. Alexander Zakharchenko, the prime minister of the self-proclaimed Donetsk People's Republic, told Russian media on Saturday that rebels were "preparing a second large-scale offensive".

Kiev said on Saturday that another air force plane had been shot down in the east, blaming it on a "Russian anti-aircraft system".

Faced with the reinvigorated insurgent push that has dramatically turned the tide of the conflict, Ukrainian forces have been trapped in a string of towns in the south-east.

Kiev's troops began a withdrawal from besieged positions near the transport hub of Ilovaysk, which lies east of the main rebel stronghold of Donetsk, after holding ground without reinforcements for 10 days.

In the Azov Sea port city of Mariupol to the south of Donetsk, citizens dug trenches as they prepared to defend the city from a possible rebel offensive from the east.