Russian President Vladimir Putin has recognised Crimea as a "sovereign and independent country", just hours after the strategic Black Sea peninsula declared it had broken away from Ukraine.
The moves triggered the toughest Western sanctions against Russia since the Cold War - with Washington and the European Union retaliating with asset freezes and travel bans and US President Barack Obama vowing to "increase the cost" if the Kremlin does not back down.
Ukraine's turmoil has become Europe's most severe security crisis in years and tensions have been high since Russian troops seized control of Crimea, which decided in a Sunday referendum to merge with Russia. Putin signed a decree recognising Crimea's independence, and Russian troops were massed near the border with Russian-speaking eastern Ukraine.
Ukraine's acting president raised tensions on the ground by calling for the activation of some 20,000 military reservists and volunteers across the country and for the mobilisation of another 20,000 in the recently formed national guard.
In the Crimean capital of Simferopol, ethnic Russians applauded the Sunday referendum that overwhelmingly called for secession and for joining Russia. Masked men in body armour blocked access for most journalists to the parliament session that declared independence, but the city otherwise appeared to go about its business normally.
The US, EU and Ukraine's new government do not recognise the referendum held on Sunday (local time) in Crimea, which was called hastily as Ukraine's political crisis deepened with the ouster of pro-Russia President Viktor Yanukovich following months of protests and sporadic bloodshed. In addition to calling the vote itself illegal, the Obama administration said there were "massive anomalies" in balloting that returned a 97 per cent "yes" vote for joining Russia.
Obama warned that Russia could face more financial punishment.
"If Russia continues to interfere in Ukraine, we stand ready to impose further sanctions," Obama said.
One of the top Russian officials hit by sanctions mocked Obama.
"Comrade Obama, what should those who have neither accounts nor property abroad do? Have you not thought about it?" Deputy Prime Minister Dmitry Rogozin tweeted. "I think the decree of the President of the United States was written by some joker."
Moscow considers the vote legitimate and Putin was to address both houses of parliament on Tuesday on the Crimean situation.
In Kiev, acting President Oleksandr Turchynov vowed that Ukraine will not give up Crimea.
"We are ready for negotiations, but we will never resign ourselves to the annexation of our land," a sombre-faced Turchynov said in a televised address to the nation. "We will do everything in order to avoid war and the loss of human lives. We will be doing everything to solve the conflict through diplomatic means. But the military threat to our state is real."
The Crimean referendum could also encourage rising pro-Russian sentiment in Ukraine's east and lead to further divisions in this nation of 46 million.
A delegation of Crimean lawmakers was set to travel to Moscow on Monday for negotiations on how to proceed. Russian lawmakers have suggested that formally annexing Crimea is almost certain - with one saying it could happen within days.
"We came back home to Mother Russia. We came back home, Russia is our home," said Nikolay Drozdenko, a resident in Sevastopol, the key Crimean port where Russia leases a naval base from Ukraine.
The Crimean parliament declared that all Ukrainian state property on the peninsula will be nationalised and become the property of the Crimean Republic. It gave no further details. Lawmakers also asked the United Nations and other nations to recognise it and began work on setting up a central bank with US$30 million (NZ$35m) in support from Russia.
The United States announced sanctions against seven Russian officials, including Rogozin, Putin's close ally Valentina Matvienko who is speaker of the upper house of parliament and Vladislav Surkov, one of Putin's top ideological aides. The Treasury Department also targeted Yanukovich, Crimean leader Sergei Aksyonov and two other top figures.
The EU's foreign ministers slapped travel bans and asset freezes against 21 officials from Russia and Ukraine following Crimea's referendum. The ministers did not immediately release the names and nationalities of those targeted by the sanctions.
"We need to show solidarity with Ukraine and therefore Russia leaves us no choice," Polish Foreign Minister Radoslaw Sikorski told reporters in Brussels before the vote. "The 'Anschluss' of Crimea cannot rest without a response from the international community."
He was referring to Nazi Germany's forceful annexation of Austria.
But markets appeared to signal that the Western sanctions lacked punch - with bourses both in Russia and Europe rising sharply on relief that they won't hit trade of business ties.
"So far the sanctions seem fairly toothless and much less severe than had been expected last week," said Kathleen Brooks, research director at Forex.com. "From the market's perspective, the biggest risk was that the referendum would trigger tough sanctions against Russia that could lead to another Cold War."
Moscow, meanwhile, called on Ukraine to become a federal state as a way of resolving the polarisation between Ukraine's western regions - which favour closer ties with the 28-nation EU - and its eastern areas, which have long ties to Russia.
In a statement on Monday, Russia's Foreign Ministry urged Ukraine's parliament to call a constitutional assembly that could draft a new constitution to make the country federal, handing more power to its regions. It also said country should adopt a "neutral political and military status", a demand reflecting Moscow's concern about the prospect of Ukraine joining Nato and possibly integrating closer politically and economically with the EU.
Russia is also pushing for Russian to become one of Ukraine's state languages alongside Ukrainian.
In Kiev, Ukraine's new government dismissed Russia's proposal Monday as unacceptable, saying it "looks like an ultimatum".
The new government in Kiev was established after pro-Russian President Viktor Yanukovich fled to Russia last month after three months of protests culminated in deadly clashes.
Ukrainian Foreign Minister Andriy Deshchytsya visited Nato headquarters in Brussels to request technical equipment to deal with the secession of Crimea and the Russian incursion there.
Nato said in a statement that the alliance was determined to boost its co-operation with Ukraine, including "increased ties with Ukraine's political and military leadership".