The European Union moved to tighten sanctions against Russia over the crisis in Ukraine on Wednesday, while stopping short of tough economic measures advocated by Washington.
"We will talk about new sanctions because we think that the Russian contribution for peace in Ukraine is not sufficient," German Chancellor Angela Merkel said on arriving for an EU summit to discuss events in Ukraine as well as filling top EU posts.
"The hostages have not been released, control of the borders has not yet been reached and the contact group doesn't work," she added.
According to a draft summit statement seen by AFP, new steps could include freezing programmes in Russia run by the EU's European Investment Bank as well as a request that the European Bank of Reconstruction and Development halt its own work in the country.
If adopted, the EU leaders would also significantly widen sanctions by targeting Russian firms "that are materially or financially supporting actions undermining or threatening Ukraine's sovereignty, territorial integrity and independence."
This could broaden the scope to Russian companies more closely connected to the Kremlin than any of the EU sanctions taken so far, a move that many member states with strong economic ties to Russia have resisted.
At a June summit in Brussels, EU leaders demanded Moscow take key steps, among them a clear backing for the Ukrainian government's peace plan and allow Kiev control of border checkpoints occupied by rebels.
So far the EU has targeted more than 70 Russian and Ukrainian figures with visa bans and asset freezes under what are known as "Phase 2" measures.
- 'Show resolve' -
But with peace still not achieved, "what is expected is a certain escalation of sanctions but that does not reach Phase 3," said French Foreign Minister Laurent Fabius, referring to the EU term for sanctions that would target entire sectors of the Russian economy, such as energy or finance.
"We must at the same time show resolve and maintain dialogue," Fabius added.
The move in Brussels comes amid increasing questions in Washington regarding the EU's cautious approach. The US has hinted it would adopt alone its own punitive steps against Russia's defence and financial sectors.
The EU has been divided over whether to adopt the US hard line with some member states, such as Italy and Germany, wary of putting major economic ties with Moscow in jeopardy.
Germany and France have been spearheading EU efforts to revive a Ukrainian truce in the hope more sanctions against Russia could be avoided.
Earlier Wednesday, Merkel's office said she and Ukrainian President Petro Poroshenko had agreed by phone that "Russia has been insufficient in meeting expectations" on steps to end Ukraine's worst crisis since its independence from Moscow in 1991.
Despite conciliatory signals by Moscow, violence between Kiev forces and separatists still flares with more than 600 killed since the beginning of the crisis.
"The situation in Ukraine is unacceptable," said British Prime Minister David Cameron, arriving for the talks.
"We need to send a very clear message with clear actions," he added.