By Lidia Kelly and Alissa de Carbonnel
MOSCOW/PEREVALNOYE, Ukraine (Reuters) - Russia paid a heavy financial price on Monday for its military intervention in neighbouring Ukraine, with stocks, bonds and the rouble plunging as President Vladimir Putin's forces tightened their grip on the Russian-speaking Crimea region.
The Moscow stock market fell 10.8 percent, wiping nearly $60 billion off the value of Russian companies, more than the $51 billion Russia spent on the Winter Olympics in Sochi last month.
The central bank spent as much as $12 billion of its reserves to prop up the rouble as investors reacted to tensions with the West over the former Soviet republic.
Putin declared at the weekend he had the right to invade Ukraine to protect Russian interests and citizens.
Moscow's U.N. envoy told a stormy meeting of the Security Council on Monday that Ukraine's ousted leader Viktor Yanukovich had sent a letter to Putin requesting he use Russia's military to restore law and order in Ukraine.
The United States began spelling out its response to Russia's incursion, announcing on Monday night it had suspended all military engagements with Russia over the crisis in Ukraine, including military exercises and port visits, and had put trade and investment talks with Moscow on hold.
President Barack Obama met for over two hours on Monday with his national security advisers to discuss what steps the United States and its allies could take to "further isolate" Russia, a White House official said.
"Over time this will be a costly proposition for Russia. And now is the time for them to consider whether they can serve their interests in a way that resorts to diplomacy as opposed to force," Obama told reporters earlier.
The State Department said the United States was preparing to impose sanctions on Russia over the intervention, although no decisions had yet been made. Members of the U.S. Congress are looking at options including sanctions on Russia's banks and freezing assets of Russian public institutions and private investors, but they said they wanted European countries to step up their involvement.
Secretary of State John Kerry will propose ways in which a negotiation between Russia and Ukraine can be overseen by a multilateral organization when he goes to Kiev on Tuesday, Obama said.
The European Union threatened unspecified "targeted measures" unless Russia returns its forces to their bases and opens talks with Ukraine's new government.
Western leaders have sent a barrage of warnings to Putin against armed action, threatening economic and diplomatic consequences, but are not considering a military response.
SHOW OF STRENGTH?
In his first public appearance for nearly a week, Putin flew to watch military manoeuvres in western Russia in what appeared designed as a show of strength.
Russia's Black Sea fleet denied reports it had given Ukrainian forces in Crimea an ultimatum to surrender by early Tuesday or face attack, Interfax news agency said. The United States said any such threat would be a dangerous escalation.
Ukraine's acting president said Russia's military presence in Crimea was growing. Ukrainian officials said Russia was building up armour on its side of the 4.5-km (2.7- mile) wide Kerch strait between the Crimean peninsula and southern Russia.
Russian forces later began shipping truckloads of troops by ferry into the Crimea region after seizing the border post on the Ukrainian side, Ukraine's border guards spokesman said.
A Reuters reporting crew at the ferry terminal in Crimea later on Monday saw no sign of unusual activity.
Kiev's U.N. ambassador, Yuriy Sergeyev, said Russia had deployed roughly 16,000 troops to Crimea since last week.
Both sides have so far avoided bloodshed, but the market turmoil highlighted damage the crisis could wreak on Russia's vulnerable economy, making it harder to balance the budget and potentially undermining business and public support for Putin.
Russian Deputy Economy Minister Andrei Klepach said market "hysteria" would subside but that strains with Brussels and Washington would continue to weigh on the economy.
On the ground in Perevalnoye, halfway between the Crimean capital, Simferopol, and the Black Sea, hundreds of Russian troops in trucks and armoured vehicles were surrounding two military compounds. The troops, who had no national insignia on their uniforms, were confining Ukrainian soldiers, who have refused to surrender, as virtual prisoners.
Ukraine called up reservists on Sunday after Putin's action provoked what British Foreign Secretary William Hague called "the biggest crisis in Europe in the twenty-first century".
The U.S. Defense Department said that although it found value in military-to-military relations with Russia, "we have, in light of recent events in Ukraine, put on hold all military-to-military engagements."
Rear Admiral John Kirby added that despite media speculation about possible ship movements in the region, "there has been no change to our military posture in Europe or the Mediterranean."
NATO allies will hold emergency talks on the crisis on Tuesday, for the second time in three days, following a request from Poland, a neighbour of Ukraine.
European Union foreign ministers held out the threat of sanctions against Russia on Monday if Moscow fails to withdraw its troops from Ukraine, while offering to mediate between the two, alongside other international bodies.
But possible divisions emerged, with the BBC citing a document, inadvertently shown to a photographer, that said Britain opposes trade sanctions on Russia and does not want to shut London's financial capital to Russians in response to the Kremlin's intervention in Ukraine.
A spokeswoman for British Prime Minister David Cameron's office said it did not comment on leaked documents. But she added, "The Prime Minister is clear that continuing to violate Ukraine's sovereignty will have costs and consequences."
The Organisation for Security and Cooperation in Europe, or OSCE, said it was trying to convene an international contact group to help defuse the crisis after Germany said Chancellor Angela Merkel had persuaded Putin to accept such an initiative.
Switzerland, which chairs the pan-European security body, said the group could discuss sending observers to Ukraine to monitor the rights of national minorities.
"There will be very, very broad consensus for that monitoring mission. We call on Russia to join that consensus, make the right choice and pull back its forces," U.S. Assistant Secretary of State Victoria Nuland told OSCE envoys in Vienna.
Graphic on Crimea crisis http://link.reuters.com/suh37v
Ukraine's ethnic divide http://link.reuters.com/dag37v
The Russian central bank raised its key lending rate by 1.5 percentage points after the rouble fell to all-time lows.
Tension over Ukraine also knocked 2 to 3 percent off European stock markets and 1 percent off Wall Street, and sent safe haven gold to a four-month high.
Chicago wheat futures rose more than 5 percent and corn about 4 percent amid fears of disruption to shipments from the Black Sea, a major grain-exporting zone.
Russian gas monopoly Gazprom , which supplies Europe through Ukraine, was down nearly 14 percent.
Gazprom's finance chief warned Ukraine that it may raise gas prices from next month, accusing Kiev of a patchy payments record, but said gas transit to Europe was normal. Ukraine has been stocking up on gas imports in the past few days to beat a feared rise, a spokesman for its gas transit monopoly said.
Ukraine's pro-Western prime minister, Arseny Yatseniuk, whose government took power when Yanukovich, a Russian ally, fled on February 21 after three months of street protests, said Putin had effectively declared war on his nation.
Yatseniuk said the government planned to cut spending by 14 to 16 percent as Ukraine prepared for talks on Tuesday with the International Monetary Fund to avert the danger of default.
RUSSIAN FLAGS FLYING
Russian forces seized Crimea, an isolated Black Sea peninsula with an ethnic Russian majority, without firing a shot. All eyes are now on whether Russia makes a military move in predominantly Russian-speaking eastern Ukraine, where pro-Moscow demonstrators have marched and raised Russian flags over public buildings in several cities in the last three days.
Pro-Russian protesters besieged lawmakers inside the regional government building in the eastern city of Donetsk, Yanukovich's hometown, on Monday in the latest such action.
Russia has staged war games with 150,000 troops along the land border, but so far they have not crossed. Kiev says Moscow is orchestrating the protests to justify a wider invasion.
At an emergency Security Council meeting, Russia's U.N. ambassador and Western envoys hurled allegations at each other for 2-1/2 hours.
"Under the influence of Western countries, there are open acts of terror and violence," Russian envoy Vitaly Churkin quoted the letter from Yanukovich as saying, brandishing a copy of it. "People are being persecuted for language and political reasons."
Churkin repeated Moscow's view that Yanukovich was Ukraine's legitimate leader, not interim President Oleksander Turchinov.
U.S. envoy Samantha Power said there was no evidence ethnic Russians or Russian-speakers in Ukraine were under threat.
Power said there was "no legal basis" for Russia to justify its military deployments in Ukraine through an invitation from the regional prime minister of the Crimea, adding only Ukraine's parliament could do that.
Churkin shot back that Power appeared to have gotten all her information about Ukraine "from U.S. TV."
A German spokesman said Merkel believed it was not too late to resolve the Ukrainian crisis by political means.
The German leader, who speaks fluent Russian, has had several long telephone calls with the German-speaking Putin since the crisis erupted with mass protests in Kiev, creating a major policy dilemma for Berlin, which is heavily dependent on Russian gas and has close economic ties.
Russian Foreign Minister Sergei Lavrov met his German counterpart, Frank-Walter Steinmeier, in Geneva on Monday, a Russian diplomat said. Lavrov will meet EU foreign policy chief Catherine Ashton in Madrid on Tuesday, RIA Novosti agency said.
On Kiev's Independence Square, or Maidan, where anti-Yanukovich protesters manned barricades for three months, crowds were smaller than in recent days as people returned to work.
"Crimea, we are with you!" read one placard. "Putin - Hitler of the 21st century," read another.
(Additional reporting by Peter Graff, Sabina Zawadzki, Pavel Polityuk, Natalia Zinets, Timothy Heritage and Stephen Grey in Kiev, Lina Kushch in Donetsk, Peter Apps in London, Steve Holland, Phil Stewart, Jeff Mason, Mark Felsenthal and Patricia Zengerle in Washington, and Lou Charbonneau at the United Nations; Writing by Paul Taylor, Alistair Lyon and Peter Cooney; Editing by Janet Lawrence and Mohammad Zargham)