(Adds Putin and Chinese president spoke by telephone)
* Russian navy blocks strait between Crimea and Russia-Ukraine
* Russian markets rise, oil prices fall
* Obama and Merkel discuss possible resolution to crisis
* 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 and said on Tuesday that 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. Russian forces fired warning shots in a confrontation with Ukrainian servicemen at an air base, 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 that force was not needed for now.
His comments, coupled with the end of Russian war games near Ukraine's borders, 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".
"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."
Western sanctions under consideration against Russia would be counter-productive, he said. A senior U.S. official said Washington was ready to impose them in days rather than weeks. The Russian Foreign Ministry warned that Moscow would retaliate.
In Washington, U.S. President Barack Obama acknowledged that Russia had legitimate interests in Ukraine but said that did not give Putin the right to intervene militarily.
"President Putin seems to have a different set of lawyers making a different set of interpretations," Obama said. "But I don't think that's fooling anybody."
A senior administration official said Obama spoke to German Chancellor Angela Merkel on Tuesday and discussed a potential resolution to the crisis.
The official said Obama, in his phone call with Putin last Saturday, had discussed what officials called an off-ramp to the crisis in which Russia would pull its forces in Crimea back to their bases and allow international monitors to ensure that the rights of ethnic Russians are protected.
The U.S. president will not attend a G8 summit scheduled for Sochi, Russia, in June unless there is a Russian reversal in the Ukraine crisis, the official added.
G7 MAY MEET SOON
Putin and Chinese President Xi Jinping spoke by telephone late on Tuesday. The Kremlin said the two leaders held "close" views on Ukraine, while the Chinese Foreign Ministry said Xi had told Putin he believed Russia can push for a political settlement.
China and Russia have close ties and see eye-to-eye on many international diplomatic issues. Both have veto powers on the United Nations Security Council.
Canadian Prime Minister Stephen Harper said on Tuesday after speaking to Obama over the weekend that the Group of Seven leading industrialised nations were considering meeting in the near future, a move that would pointedly exclude Russia. The G7 became the G8 in 1998 when Russia was formally included.
U.S. Secretary of State John Kerry, on his first visit to Kiev since the overthrow of Russian-backed President Victor Yanukovich, accused Moscow of seeking a pretext to invade more of the country.
Kerry laid flowers in Independence Square at a memorial to pro-Western protesters killed by police last month, describing the experience as "moving, distressing and inspiring". He met Ukraine'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 such terror as we see now" would be legitimate, he said.
Kerry said the United States was not seeking a confrontation and would prefer to see the situation managed through international institutions such as the Organisation for Security and Cooperation in Europe, or OSCE.
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".
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.
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 fragility of the situation in Crimea, a Russian soldier fired three volleys of shots over the heads of unarmed Ukrainian servicemen who marched bearing the Ukrainian flag towards their aircraft at a military airfield surrounded by Russian troops at Belbek, near 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 eventually 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.
The rouble strengthened 1.2 percent to 36.07 to the dollar on Tuesday as Russian stocks jumped 5.3 percent, recouping almost half of the previous day's losses.
Oil prices fell as Putin's remarks reduced the chances that energy supply from Russia, the No. 2 world oil exporter, could be disrupted or subject to sanctions.
Despite Putin's more conciliatory comments, NATO said Russia had shown few signs of de-escalating matters, as members of the military alliance 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.
In further pressure on Kiev, Russia's top gas producer Gazprom said it would remove a discount on gas prices for Ukraine from April.
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.
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 with an ethnic Russian majority.
Putin is dismayed that the new leadership in Ukraine 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 OSCE would travel at its invitation to Crimea in an attempt to defuse the military standoff there. It was not clear if Russia would let them into the peninsula.
Ukrainian officials say Moscow has poured additional troops into Crimea, which former Soviet leader Nikita Khrushchev transferred from Russia to Ukraine in 1954 when both republics were part of the Soviet Union.
The United States on Monday suspended all military engagements with Russia, including military exercises and port visits, and froze trade and investment talks with Moscow.
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. (Additional reporting by Pavel Polityuk, Natalia Zinets and Lesley Wroughton in Kiev, Andrew Osborn in Sevastopol, Thomas Peter in Kerch, Mike Shields in Vienna, and Steve Holland in Washington; Writing by Timothy Heritage, Giles Elgood, Paul Taylor and Peter Cooney; Editing by Anna Willard, Will Waterman and Ken Wills)
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