UPDATE 1-Talk of sanctions hits Russia where it hurts-the economy
* West threatens sanctions over Crimea crisis
* Russian officials outline possible retaliation
* Russian economy faces growing difficulties
By Elizabeth Piper and Darya Korsunskaya
MOSCOW, March 5 (Reuters) - Asset confiscations, non-payment of debts and rejection of the dollar - Russian officials have promised to retaliate if the United States and European Union impose sanctions over its seizure of Ukraine's Crimea region.
But the tough talk and President Vladimir Putin's exaggerated lack of concern about possible sanctions ignore the reality that even by talking about such moves, Washington and Brussels have hit him where it hurts - the faltering economy.
A drive to isolate Moscow over what the West says is its military seizure of neighbouring Ukraine's Crimea region has accelerated capital flight, tainted the investment climate and forced Russians to pay more for everyday goods.
"It's a serious mistake. First, it has undermined confidence in the rouble," said Konstantin Remchukov, editor-in-chief and general director of Nesavisimaya Gazeta newspaper, questioning the risks taken by the Kremlin in its Ukraine policy.
"Second it has undermined investment plans ... Third it has hit in the pocket of people who are now paying more for a pack of butter," he told Ekho Moskvy radio.
Putin has denied giving the orders in Crimea - where Russian servicemen have been seen by reporters alongside armed men with no insignia who control military installations and official buildings - and warned that sanctions would hurt both sides.
Projecting Russia as a strong power able to take on Cold War-era adversaries has helped push his popularity ratings up to nearly 70 percent, but on Wednesday he signalled he may be more worried about the impact on the fragile economy than he lets on.
On Monday, the central bank burned through $11 billion to prop up the rouble and stock markets plunged 10-12 percent, indicating little appetite for an economy which grew just 1.3 percent last year and is set to slow further.
"It's not necessary to add to the difficult situation. We need to cooperate with all our traditional partners - while providing for our interests, of course," Putin told a meeting of his cabinet ministers.
"It is not necessary to whip things up and place political considerations on top of issues of economic cooperation."
That was at odds with some loyal officials who touted a raft of measures Russia could impose on foreign businesses - a carrot-and-stick approach perhaps intended to keep Western policymakers guessing.
"We will have to respond," Foreign Ministry spokesman Alexander Lukashevich said. "As always in such situations, provoked by rash and irresponsible actions by Washington, we stress: this is not our choice."
Kremlin aide Sergei Glazyev, often used by the authorities to trail a hardline stance, said Moscow might be forced to drop the dollar as a reserve currency and refuse to pay off any loans to U.S. banks. The Kremlin quickly stepped in to say he was expressing his personal opinion.
On Wednesday, RIA news agency quoted Andrei Klishas, head of the constitutional legislation committee in the upper parliament house, as saying lawmakers were working on a draft law to allow the confiscation of property, assets and accounts of European or U.S. companies if sanctions are were imposed.
The bill "would offer the president and government opportunities to defend our sovereignty from threats", he said.
Moscow's firm stance has hardened attitudes in the West.
French Foreign Minister Laurent Fabius said European Union leaders who will meet in Brussels on Thursday could decide on sanctions against Russia if there is no "de-escalation" by then. Such measures could include restrictions on visas, the assets of individuals and EU economic negotiations, he said.
Washington has called off military cooperation, and frozen trade talks with Moscow. Other members of the Group of Eight most industrialised countries have pulled out of preparations for a June meeting in Russia's Black Sea resort of Sochi.
While that has hurt sentiment, the consideration of measures such as targeting Russian banks suspected of illicit financing, or officials with visa bans and asset freezes, hits at the heart of Putin's powerbase.
"If such a confrontation continues and the international community assesses Russian actions in Ukraine as 'not playing according to the rules', then there could be long-term economic consequences in trying to attract capital, and in capital flight," said MDM Bank chairman Oleg Vyugin, a former Russian financial market regulator who now advises Morgan Stanley.
Former economy minister Andrei Nechayev said sanctions could decimate the economy, especially if they required the early repayment of loans. Foreign corporate debt stood at $750 billion, half of it owned by state banks and companies, he said.
"The authorities would hardly let them go bankrupt so would have to cover their debts from foreign exchange reserves which would lead to a sharp drop in the rouble," Nechayev said.
The rouble fell 2 percent against the dollar on Monday after Putin said he had won approval to invade Ukraine if the situation deteriorated there - a policy he has since defended while saying force was a "last resort".
The Russian currency has stabilised since, largely thanks to the central bank spending around $11 billion in foreign exchange reserves to prop up the rouble on Monday. Only days ago the bank head was talking up a currency she had hoped to float freely.
But it will do little to reassure many of Russia's middle class voters, whom Putin won over in the early years of his rule by establishing stability after the chaos unleashed when the Soviet Union fell.
"It will hit the middle class," said Remchukov, adding that many Russians see roubles in terms of foreign currency to buy Western goods, such as clothing and food. "Therefore such a sharp decline in revenues due to the devaluation of the rouble .. is an irresponsible policy of our authorities."