Ukraine mobilised for war on Sunday and Washington threatened to isolate Russia economically after President Vladimir Putin declared he had the right to invade his neighbour in Moscow's biggest confrontation with the West since the Cold War.

"This is not a threat: this is actually the declaration of war to my country," Ukrainian Prime Minister Arseny Yatseniuk said in English. Yatseniuk heads a pro-Western government that took power in the former Soviet republic when its Moscow-backed president, Viktor Yanukovich, was ousted last week.

Putin secured permission from his parliament on Saturday to use military force to protect Russian citizens in Ukraine and told US President Barack Obama he had the right to defend Russian interests and nationals, spurning Western pleas not to intervene.

Financial markets reacted to the escalating tensions when trading opened in Asia on Monday, with oil and wheat futures jumping and stock indexes falling.

Russian forces have already bloodlessly seized Crimea, an isolated Black Sea peninsula where Moscow has a naval base.

On Sunday, they surrounded several small Ukrainian military outposts there and demanded the Ukrainian troops disarm. Some refused, leading to standoffs, although no shots were fired.

As Western countries considered how to respond to the crisis, the US said it was focused on economic, diplomatic and political measures, and made clear it was not seriously considering military action.

US Secretary of State John Kerry will visit Kiev on Tuesday to show "strong support for Ukrainian sovereignty, independence, territorial integrity, and the right of the Ukrainian people to determine their own future, without outside interference or provocation", the State Department said in a statement.

The Group of Seven major industrialized nations, condemning the Russian intrusion into Ukraine, suspended preparations for the G8 summit that includes Russia and had been scheduled to take place in June in Sochi, site of the recent Winter Olympics.

Finance ministers from the G7 said they were ready to offer "strong financial backing" to Ukraine, provided the new government in Kiev agreed to pursue economic reforms sought by the International Monetary Fund.

Analysts said US economic sanctions would likely have little impact on Russia unless they were paired with strong measures by major European nations, which have deeper trade ties with Moscow and are dependent on Russian gas.

But EU officials said the European Union was unlikely to match the US in threatening sanctions against Russia when its foreign ministers meet to discuss Ukraine on Monday, instead pushing for mediation between Moscow and Kiev.

Wheat futures spiked more than 4 percent on Monday on fears of disruption to shipments from one of the world's key exporting regions. Oil rose as much as 2 percent, while U.S. stocks futures fell 1 percent.

MORE DEMONSTRATIONS

With Russian forces in control of majority ethnic Russian Crimea, the focus is shifting to eastern swaths of Ukraine, where most ethnic Ukrainians speak Russian as a native language.

Those areas saw more demonstrations on Sunday after violent protests on Saturday, and pro-Moscow activists hoisted flags for a second day at government buildings and called for Russia to defend them.

Russia has staged war games with 150,000 troops along the land border, but they have so far not crossed. Kiev said Russia had sent hundreds of its citizens across the border to stage the protests.

Ukraine's security council ordered the general staff to immediately put all armed forces on highest alert. But Kiev's small and under-equipped military is seen as no match for Russia's superpower might.

The Defence Ministry was ordered to stage a call-up of reserves, meaning theoretically all men up to 40 in a country with universal male conscription, although Ukraine would struggle to find extra guns or uniforms for many of them.

Kerry condemned Russia for what he called an "incredible act of aggression" and brandished the threat of economic sanctions.

"You just don't, in the 21st century, behave in 19th century fashion by invading another country on a completely trumped-up pretext," Kerry told the CBS programme "Face the Nation".

He said Moscow still had a "right set of choices" to defuse the crisis. Otherwise, G8 countries and other nations were prepared to "to go to the hilt to isolate Russia".

"They are prepared to isolate Russia economically. The rouble is already going down. Russia has major economic challenges," he said. Kerry mentioned visa bans, asset freezes and trade isolation as possible steps.

Obama held calls with German Chancellor Angela Merkel, British Prime Minister David Cameron and Polish President Bronislaw Komorowski. The leaders expressed "grave concern" over Russia's action and stressed that "dialogue between Ukraine and Russia should start immediately, with international facilitation as appropriate", the White House said.

Ukraine's envoy to the UN said Kiev would ask for international military support if Russia expanded its military action in his country.

At Kiev's Independence Square, where anti-Yanukovich protesters had camped out for months, thousands demonstrated against Russian military action. Speakers delivered rousing orations and placards read: "Putin, hands off Ukraine!"

"If there is a need to protect the nation, we will go and defend the nation," said Oleh, an advertising executive cooking over an open fire at the square where he has been camped for three months. "If Putin wants to take Ukraine for himself, he will fail. We want to live freely and we will live freely."

The new government announced it had fired the head of the navy and launched a treason case against him for surrendering Ukraine's naval headquarters to Russian forces in the Crimean port of Sevastopol, where Moscow has a major naval base. - Reuters