* Rouble strongest vs dollar, euro since end-February
* Shares rebound, but analysts see risks remaining
* FinMin sees rouble firming, if external (Adds latest prices, comment, bond sale cancellation)
By Lidia Kelly
MOSCOW, March 25 The Russian rouble firmed to pre-Crimea crisis levels on hopes that conflict between Moscow and the West over Russia's annexation of the Ukrainian peninsula would ease and on increased demand for the currency for local tax payments.
At 1145 GMT, the rouble was 1 percent firmer against the dollar at 35.70 and 1.3 percent firmer at 49.30 versus the euro, its strongest since Russian President Vladimir Putin declared Russia had the right to invade Ukraine on March 1.
This has left the rouble up 1.1 percent at 41.83 against the dollar-euro basket that the central bank uses for gauging the rouble's nominal exchange rate.
"If there is stability in external economic affairs, then the rouble should not weaken, and an inverse process of transition from foreign currency into roubles can take place," Finance Minister Anton Siluanov told journalists.
At a meeting on the sidelines of a larger nuclear security meeting on Monday in The Hague, the Group of 7 leading nations suspended their participation in the G8 - which includes Russia - until Putin changes course.
The group warned of further possible moves against Moscow, but did not impose any new sanctions. Russia's peers in the BRICS group, which include Brazil, China, India and South Africa spoke in support of Putin.
"This result gives the impression that Russian politicians in the diplomatic field have managed to stabilise the situation," Fedor Bizikov, senior portfolio manager at GHP Group in Moscow, said in a note.
"Due to the lack of negative news, the rouble has rebounded quite a bit. However, it is too early to talk about the beginning of a clear trend in the rouble."
Bizikov reckons investors will be watching for a final statement by the United States that can come after the meetings in The Hague end.
Exporters converting their foreign currency revenues to pay monthly taxes gave also a helping hand to the rouble.
Mineral extraction taxes, due on Wednesday, are expected to take 220 billion roubles ($6.10 billion) to 260 billion from the market. Friday's deadline for income tax will demand another 300 billion roubles or so.
"(The taxes) should support the rouble, but the main risk is still associated with any moves by the West and new sanctions, uncertainty of which remains," analysts at ING Bank in Moscow wrote in a note.
Russian shares also rose sharply, with the dollar-denominated RTS index gaining 2.8 percent to 1,162.8 points. The rouble-traded MICEX was 1.6 percent up at 1,318.1 points.
The United States and the European Union last week banned visas and froze assets for a group of Russians close to Putin. Economists reckon the risks from the situation in Ukraine are not over yet.
"Countries on the receiving end of significant U.S. sanctions do not have major financial markets," Kingsmill Bond, an analyst at Sberbank Investment Research, wrote in a note. "This is the key risk for foreign investors in Russia, as we estimate that they own 70 percent of both the equity free float and the Eurobond market."
Yields on Russian Eurobonds stopped rising after climbing on average 100 basis points since Putin declared Russia's right to invade Ukraine in early March. They were still oscillating around two-year highs.
Yield on the benchmark Eurobond maturing in 2030 was 5.19 percent on Tuesday, little changed from the previous session.
For the fourth week in a row the Russian finance ministry cancelled its weekly treasury bond auction, citing "unfavourable market conditions".
Foreign investors held a bit more than a fifth of the domestic treasury bonds at the end of January, according to the most recent data from the central bank.
The market share of non-residents has most likely dropped in March, after the escalation of the East-West conflict over Crimea, analysts say.
For rouble poll data see
For Russian equities guide see
For Russian treasury bonds see
Russia in graphics: link.reuters.com/dun63s
($1 = 36.0913 Russian Roubles) (Reporting by Lidia Kelly; Additional reporting by Vladimir Abramov and Darya Korsunskaya; Writing by Lidia Kelly; Editing by Larry King and Stephen Powell)