By Tom Körkemeier and Sabine Siebold
BRUSSELS/NEWPORT Wales (Reuters) - The European Union was set to agree on new economic sanctions against Russia on Friday but could suspend them if Moscow withdraws its troops from Ukraine and observes a ceasefire, German Chancellor Angela Merkel said.
Ukrainian government representatives and pro-Russian rebels agreed to declare a ceasefire on Friday at talks in Minsk, the first such breakthrough in the five-month war, but Merkel said the deal was not in itself enough to halt sanctions.
It would have to be verified whether the ceasefire was being implemented, whether Russian troops were being withdrawn and whether a buffer zone was established, she told a news conference at a NATO summit, adding: "Everything is in flux."
"Therefore we should expect that these sanctions could indeed be put into force, but with the proviso that they can be suspended again if this process really takes place," she said.
Britain also backed such a solution. Foreign Secretary Phillip Hammond told the BBC he favored going ahead with the immediate implementation of sanctions and then lifting them if the ceasefire held.
Earlier, diplomats spoke of possibly postponing the entry into force of the sanctions for up to a week to give President Vladimir Putin time to show he was resolving the conflict.
Envoys from member states were meeting in Brussels on Friday and the diplomats said the details of the additional sanctions package should be settled then.
The European Union and United States imposed sanctions against Russia after Moscow annexed Ukraine's Crimea peninsula in March, and tightened them since then, accusing Russia of supporting pro-Russian separatists in Ukraine's east.
The latest wave of sanctions was announced after Western countries said they believed Russia had send ground troops into Ukraine, helping the rebels launch a major advance last week.
French President Francois Hollande said on Thursday shortly after Ukrainian President Petro Poroshenko's announcement of plans for a ceasefire that sanctions would be activated "if there is no progress (on Ukraine), but everything will depend on the coming hours".
EU leaders agreed at a summit last Saturday to prepare the new, third, set of sanctions within the week and diplomats said the 28 ambassadors should be able to iron out outstanding differences on a text of measures later on Friday.
Governments are wrangling over details, partly in the hope of limiting the effects of sanctions on their own economies and businesses operating in their own markets. Several smaller EU countries, notably the Czech Republic and Slovakia, have expressed scepticism about sanctions.
Among the most contentious areas is a proposed tightening of an export ban on goods that can have both a military as well as a civilian purpose.
There are also differences over the wording of measures to ban Russian state-owned companies from borrowing through syndicated loans in the EU, sources said, as well as over a list of Russians to be subject to a ban on entry to the bloc.
One key element of the new sanctions will be expanding a ban on raising money in the EU capital market to all Russian state-owned firms. An existing ban applies only to state-owned banks. Expanding the ban could affect major oil Russian oil companies, including Rosneft .
Other measures include: banning syndicated EU loans to Russian government-owned banks and institutions, and banning the sale of Russian derivative instruments in the bloc. A ban on selling debt instruments with a maturity of longer than 90 days would be extended to debt for longer than 30 days.
Outside the financial sector, the proposals include an expansion of an export ban on goods that could have military uses to all potential Russian importers, not just companies in the defense sector.
And a ban on selling advanced technologies in the energy sector to Russia could be extended to include servicing agreements, affecting EU companies working in Russia.
Some member states have suggested barring Russian Defense Minister Sergei Shoigu from entering the EU, diplomats said.
And some have floated an EU cultural and sports boycott of Russia - though that is not expected to be agreed on soon.
(Additional reporting by Jan Strupczewski and Robin Emmott in Brussels and Paul Taylor in Newport, Wales; Writing by Alastair Macdonald; Editing by Peter Graff and Giles Elgood)