(Adds strait blockaded, Ukraine PM on talks)
* Putin says use of force would be last resort
* Russian markets rise, euro and dollar strengthen
* Russian navy blocks strait between Crimea and Russia-Ukraine
* Kerry in Kiev, announces U.S. aid to Ukraine
* U.S. official says Washington working on sanctions
By Vladimir Soldatkin and Alexei Anishchuk
MOSCOW, March 4 (Reuters) - President Vladimir Putin delivered a robust defence of Russia’s actions in Crimea on Tuesday and said he would use force in Ukraine only as a last resort, easing market fears that East-West tension over the former Soviet republic could lead to war.
But tension remained high on the ground, with Russian forces firing warning shots in a confrontation with Ukrainian servicemen, and Russian navy ships were reported to have blockaded the strait separating the Ukrainian Black Sea peninsula from Russia.
At his first news conference since the crisis began, Putin said Russia reserved the right to use all options to protect compatriots who were living in “terror” in Ukraine, but force was not needed for now.
His comments lifted Russian bonds and stock markets around the world after a panic sell-off on Monday.
Putin denied the Russian armed forces were directly engaged in the bloodless seizure of Crimea, saying the uniformed troops without national insignia were “local self-defence forces”.
Western sanctions under consideration against Russia would be counter-productive, he warned. A senior U.S. official said Washington was ready to impose them in days rather than weeks.
U.S. Secretary of State John Kerry made his first visit to Kiev since the overthrow of Russian-backed President Victor Yanukovich, describing the experience as “moving, distressing and inspiring”.
Kerry laid flowers in Independence Square at a memorial to pro-Western protesters killed by police last month, met the country’s interim leaders and announced a $1 billion economic package and technical assistance for the new government.
Putin said there had been an unconstitutional coup in Ukraine, and Yanukovich, who fled to Russia last week, was still the legitimate leader. No Ukrainian government elected under current circumstances, with “armed terrorists” in control, would be legitimate, he said.
Kerry dismissed the Russian leader’s account of events, telling a news conference in Kiev: “Not a single piece of credible evidence supports these claims.”
He accused Moscow of invading Crimea in an act of aggression against Ukraine but said the United States was not seeking a confrontation and would prefer to see the situation managed through international institutions.
Ukrainian Prime Minister Arseny Yatseniuk told reporters in Kiev that the Ukrainian and Russian governments had begun consultations on the crisis “at the level of ministers”. He gave no details.
The Feb. 22 ousting of Yanukovich after months of street protests in Kiev and Russia’s seizure of control in Crimea have prompted the most serious confrontation between Moscow and the West since the end of the Cold War.
Western governments have been alarmed at the possibility that Russia may also move into eastern and southern Ukraine, home to many Russian speakers, which Putin did not rule out.
“There can be only one assessment of what happened in Kiev, in Ukraine in general. This was an anti-constitutional coup and the armed seizure of power,” he said, looking relaxed as he sat before a small group of reporters at his residence near Moscow.
“As for bringing in forces, for now there is no such need, but such a possibility exists,” he said. “What could serve as a reason to use military force? It would naturally be the last resort, absolutely the last.”
Earlier on Tuesday, Putin ordered troops involved in a military exercise in western Russia, close to the border with Ukraine, back to their bases. He said armed men who had seized buildings and other facilities in Crimea were local groups.
But in a sign of the extreme fragility of the situation in Crimea, a Russian soldier fired three volleys of shots over the heads of Ukrainian servicemen who marched unarmed towards their aircraft at a military airfield surrounded by Russian troops at Belbek, near the port of Sevastopol.
After a standoff in which the two commanders shouted at each other and Russian soldiers levelled rifles and rocket-propelled grenade launchers at the Ukrainians, the incident was defused and the Ukrainians dispersed. No one was hurt.
The Ukrainian border guard service said Russian navy ships had blocked both ends of the Kerch Strait between Crimea and Russia, but Ukraine’s infrastructure ministry said the 4.5-km (2.7-mile) wide waterway was still open for civilian shipping.
Russian dollar bond markets rebounded on Tuesday, encouraged by Putin’s comments.
Russia had paid a heavy financial price on Monday for its military intervention in Ukraine, with nearly $60 billion wiped off the value of Russian firms on the Moscow stock market.
Despite Putin’s more conciliatory comments, Russia has shown few signs of de-escalating its conflict with Ukraine so far, NATO said on Tuesday as its members held emergency talks on the crisis. Other incidents showed tensions remained high.
Turkey on Monday scrambled eight F-16 fighter jets after a Russian surveillance plane flew along its Black Sea coast, the military said.
Kerry’s visit to Kiev came as Washington and its Western allies step up pressure on Moscow to withdraw its troops from Crimea or face economic sanctions and diplomatic isolation.
A senior U.S. administration official said Washington would work with Congress to approve $1 billion in loan guarantees to help lessen the impact on Ukrainians of proposed energy subsidy cuts.
In further pressure on Kiev, Russia’s top gas producer Gazprom said it would remove a discount on gas prices for Ukraine from April.
Putin secured parliamentary backing at the weekend to invade Ukraine if necessary to protect Russian interests and citizens after Yanukovich’s downfall. Russia’s Black Sea Fleet has a base in Crimea, a peninsula that has an ethnic Russian majority.
The exercises in central and western Russia, which began last week and raised fears that Russia might send forces into Russian-speaking regions of east Ukraine, ended on schedule.
The announcement that troops and their headquarters were returning to barracks sent a more conciliatory message than much of the rhetoric from Russian officials.
Putin is dismayed that the new leadership in Ukraine, the cradle of Russian civilisation, has plotted a course towards the European Union and away from what had been Moscow’s sphere of influence during generations of Soviet Communist rule.
Ukraine said observers from the Organization for Security and Cooperation in Europe, a pan-European security body, would travel at its invitation to Crimea in an attempt to defuse the military standoff there.
Ukrainian officials say Moscow has poured additional troops into Crimea, a region that former Soviet leader Nikita Khrushchev transferred from Russia to Ukraine in 1954 when both republics were part of the Soviet Union.
The United States has begun spelling out its response to Russia’s incursion, announcing a suspension of all military engagements with Russia, including military exercises and port visits, and freezing trade and investment talks with Moscow.
President Barack Obama met national security advisers on Monday to discuss how the United States and its allies could “further isolate” Russia, a White House official said.
“Over time this will be a costly proposition for Russia,” Obama told reporters.
A Kremlin aide said that if the United States did impose sanctions, Moscow might drop the dollar as a reserve currency and refuse to repay loans to U.S. banks.
The European Union, which will hold an emergency summit on Thursday, has threatened unspecified “targeted measures” unless Russia returns its forces to their bases and opens talks with Ukraine’s government.
Western leaders are not considering a military response, but NATO Secretary-General Anders Fogh Rasmussen said the Western allies would intensify their assessment of how Russia’s military moves in Ukraine affect the alliance’s security.
“NATO allies stand together in the spirit of strong solidarity in this grave crisis,” he told reporters in Brussels after NATO ambassadors met at Poland’s request.
Italian Foreign Minister Federica Mogherini said Russia had agreed to meet NATO representatives on Wednesday to discuss Ukraine. EU leaders will hold an emergency summit on Thursday.
Russia’s military moves around the Kerch strait found some local support. Vladimir, a 50-year-old cab driver from Kerch, said people do not want the Russians to leave.
“When they are here, it is safer,” he said, voicing the opinions of some in the region who fear a return to the chaos in Ukraine after the collapse of the Soviet Union. (Additional reporting by Pavel Polityuk, Natalia Zinets and Lesley Wroughton in Kiev, Andrew Osborn in Sevastopol, Thomas Peter in Kerch, Mike Shields in Vienna; Writing by Timothy Heritage, Giles Elgood and Paul Taylor; editing by Anna Willard and Will Waterman)