* Russia will suffer economically and politically, she says
* Merkel's diplomatic overtures to Putin have failed so far
* Germany dropping reticence on sanctions as crisis drags
By Stephen Brown and Madeline Chambers
BERLIN, March 13 (Reuters) - Germany's Angela Merkel warned Moscow on Thursday that it risked "massive" political and economic damage if it refused to change course on Ukraine, saying Western leaders were united in their readiness to impose sanctions on Russia if necessary.
The chancellor, using her strongest language since the start of the crisis and removing any suspicion that Germany might seek to avoid a confrontation with President Vladimir Putin, said his actions would lead to "catastrophe" for Ukraine and much more.
"We would not only see it, also as neighbours of Russia, as a threat. And it would not only change the European Union's relationship with Russia," she said in a speech in parliament. "No, this would also cause massive damage to Russia, economically and politically."
Merkel has acknowledged that her efforts to persuade Putin to negotiate via a "contact group" with the transition government in Kiev - which he accuses of ousting Russian-backed president Viktor Yanukovich unlawfully - have failed and time is running out.
Russian troops have seized control of the Ukrainian region of Crimea on the Black Sea, backing separatists who have taken over the local government and are preparing a referendum on Sunday which could pave the way for annexation by Russia.
Merkel reiterated that if Putin continues to snub diplomacy and lets the referendum in Crimea go ahead, the EU - in close coordination with Washington and NATO - would impose tougher sanctions than the largely symbolic measures taken so far.
Travel bans and asset freezes on people and firms accused by Brussels of helping to violate Ukraine's territorial integrity could be approved by EU foreign ministers on Monday.
European leaders, who meet next Thursday, will discuss action affecting trade with Russia if it presses ahead with its current course in Ukraine.
"To be absoultely clear, none of us want it to come to such measures but we are all ready and determined to if they are unavoidable," said Merkel.
Germany receives over a third of its gas and oil from Russia and over 6,000 German firms are active there. A poll last week showed that a majority of Germans oppose sanctions against Russia.
Merkel grew up behind the Iron Curtain, speaks Russian and has tried to leverage her influence with Putin, whom she has known for 14 years, in countless phone calls. The former KGB officer, who himself speaks German, is said to respect her as a strong leader.
But Merkel lamented in an unusually emotive speech that the Russian leader was destroying years of post-Soviet rapprochement and was dragging Europe back into "a conflict about spheres of influence and territorial claims that we know from the 19th or 20th-century but thought were a thing of the past".
"The territorial integrity of Ukraine cannot be called into question," she told the Bundestag lower house of parliament, making clear that Crimea could not be compared to Kosovo, which seceded from the former Yugoslavia in 2008.