(Adds comment and context, updates prices)
MOSCOW, April 14 (Reuters) - Russian stocks and the rouble fell sharply on Monday as Ukraine prepared to fight pro-Russian rebels, heightening fears of Russian military intervention and more western sanctions against Moscow.
At 0800 GMT the rouble-denominated MICEX index was down 1.6 percent to 1,340 points and the dollar-denominated RTS index fell 2.6 percent to 1,173 points.
"The escalation sharply increases risks of an all-out civil war in Ukraine," said Bank of America Merrill Lynch analysts in a research note. "Even though it is still not our baseline scenario, the entire development is clearly negative for the market (and raises) renewed fears of another wave of sanctions from the West."
Kiev has said that it will use force against armed militants in eastern Ukraine who seized control of several government buildings and ignored a deadline to disarm.
Western governments have blamed Russia for stoking the unrest and warned of additional sanctions if it intervenes militarily or continues to destabilise Ukraine.
Despite the deteriorating situation, some analysts doubted that Russia would send troops to support the pro-Russian rebels.
"The invasion of Russian forces into the eastern regions of Ukraine is unlikely, because political isolation and an economic slump isn't part of the Kremlin's plans," said BCS analyst Mark Bradford in a morning note.
A U.S. source told Reuters that broad sanctions against sectors of the Russian economy are probably not on the immediate agenda.
The U.S. has previously warned that it may introduce sanctions against whole economic sectors including energy, mining and banking.
Investors are also eyeing four-way negotiations between Russia, Ukraine, the EU and U.S. on solutions to the crisis in Geneva on Thursday.
"If that planned meeting is cancelled this would be taken as a very negative signal by investors and we would see a further step down in equities, the rouble, and in debt markets," said Macro-Advisory consultant Chris Weafer in a report.
Weafer said that investors also need to closely follow negotiations to resolve a dispute over Ukraine's gas debts to Russia and the price it pays for Russian gas.
"A clear agreement on the gas issues or positive signals from the four-way talks ...may encourage more investors to take advantage of cheap valuations (of Russian assets)," he wrote.
The rouble was 1 percent weaker at 36 against the dollar and 0.8 percent weaker at 49.87 against the euro. , its lowest levels for three weeks. It fell 0.9 percent to 42.24 against the dollar-euro basket.
(Reporting by Megan Davies and Jason Bush, additional reporting by Vladimir Abramov; Editing by John Stonestreet)