By Maria Tsvetkova and Luke Baker
MOSCOW/BRUSSELS, March 20 (Reuters) - Russia raced to complete its annexation of Crimea and built up its forces in the region in defiance of Ukrainian and Western condemnation, as EU leaders gathered to consider imposing tough economic sanctions against Moscow - but not yet.
The State Duma lower house of parliament approved a treaty on Thursday incorporating the Black Sea peninsula, captured from Ukraine, into the Russian Federation, even as U.N. Secretary-General Ban Ki-moon was in Moscow for talks on the crisis.
Kiev said its border guards in Crimea, surrounded and outnumbered by Russian forces, had begun redeploying to the mainland after units loyal to Moscow stormed two Ukrainian military bases in the main town of Simferopol on Wednesday.
German Chancellor Angela Merkel told parliament in Berlin that the 28 European Union leaders would show they are ready to ramp up punitive measures in a staged response against Russian officials and move to politically sensitive economic sanctions if President Vladimir Putin goes further.
"The EU summit today and tomorrow will make clear that we are ready at any time to introduce phase-3 measures if there is a worsening of the situation," Merkel said.
Some diplomats read her statement as an implicit recognition that Crimea was lost, and that only further steps by Russia to destabilise Ukraine or intervene in other post-Soviet republics would trigger sanctions that could hurt convalescing Western economies as well as Moscow's.
Russian forces took control of the region in late February following the toppling of Moscow-backed Ukrainian President Viktor Yanukovich by protests provoked by his decision to spurn a trade deal with the EU and seek closer ties with Moscow. People in Crimea voted overwhelmingly in a referendum last Sunday to join Russia.
Only one deputy in the State Duma voted against the treaty, while 443 lawmakers backed it, rising for the national anthem after the vote. The upper house is due to complete the formal ratification on Friday.
"From now on, and forever, the Republic of Crimea and Sevastopol will be in the Russian Federation," pro-Kremlin lawmaker Leonid Slutsky said in an address before the vote.
With Putin celebrating Crimea's return to "home port" and his aides mocking the EU's response as puny, European leaders are expected to add around a dozen names to the 21 Russians and Crimeans already placed on a travel-ban and asset-freeze list.
French President Francois Hollande said the EU would suspend political relations with Russia, cancelling the next regular EU-Russia summit due in the Olympic venue of Sochi in July.
"If Russia agrees to open discussions, if a de-escalation can be confirmed, we won't move to other sanctions," Hollande told reporters on arrival in Brussels. "But if on the contrary illegal claims increase, if there are troop operations, if there are threats, then there will be other sanctions."
Including a handful of figures closer to Putin and calling off a summit falls well short of the financial and trade sanctions diplomats and analysts say would be required to make Moscow pay attention.
Under the staged response that EU leaders agreed last week, phase three would involve restrictions on trade in energy, finance and armaments.
Behind their tough rhetoric, many EU governments are anxious to avoid damaging their national economic interests. They also want to keep Russia's cooperation, if possible, on global issues from Iran's nuclear programme to the Syrian civil war, security in Afghanistan and managing North Korea's unpredictable leader.
Moscow has made clear how it could inflict economic harm selectively in Europe if subjected to sanctions.
It said on Thursday it would demand compensation if France cancels a contract to deliver two Mistral-class helicopter carriers to its navy. It is also threatening to shut down one of three major border crossings with Finland through which much lucrative truck traffic from Europe runs, although Russian officials say this has nothing to do with the Crimean crisis.
Deputy Defence Minister Yuri Borisov was quoted by state news agency Itar-Tass as saying Russia will boost its military presence in Crimea to protect against external threats.
"It will be necessary to develop the military infrastructure on the peninsula so that Crimea would be a worthy representative of the Russian Federation and be protected against all possible encroachments," he said.
Britain circulated a paper before the EU summit calling for European countries to work over time to reduce their dependence on Russian energy - an initiative that appeared aimed mostly at Germany, which gets 40 percent of its gas from Moscow.
France has said it may consider suspending delivery of the two warships but has pressed for Britain publicly to close the City of London financial centre to oligarchs close to Putin.
Officials say Britain cannot simply seize bank accounts without evidence linking the holder to Russian action in Crimea.
Tension between Moscow and Kiev spilled into the economic field with Russian authorities stepping up customs checks on goods from Ukraine and occupying a chocolate factory in Russia owned by a magnate close to Kiev's new rulers.
The Ukrainian government said Russian riot police took control of the Roshen factory in Lipetsk on Wednesday. The company is controlled by Petro Poroshenko, one of Ukraine's richest men, who supported the overthrow of Yanukovich.
A company spokeswoman said Russian authorities were investigating the firm, which was caught up in a trade row between Kiev and Moscow last year. Roshen's accounts in Russian banks had been frozen on March 14, she added.
In Vienna, the Organisation for Security and Cooperation in Europe said it was sending a 15-member team of experts to Ukraine as part of a four-week "national dialogue project" that would "gather information about issues of concern, in particular political, humanitarian and minority issues".
Authorised by the Kiev government, "The project aims to contribute to a peaceful and sustainable political transition in the country and to immediately address problematic issues through supporting a national, inclusive and impartial dialogue throughout Ukraine", an OSCE statement said.
Russia has blocked OSCE military observers from entering Crimea and Tim Guldimann, envoy of the Swiss OSCE chairman, told a briefing in Kiev there was still no consensus in the 57-member security watchdog for sending a broader monitoring mission to Ukraine. (Additional reporting by Noah Barkin in Berlin, Adrian Croft and Martin Santa in Brussels, Thomas Grove and Steve Gutterman in Moscow, Natalia Zinets and Pavel Polityuk in Kiev; Writing by Paul Taylor; editing by David Stamp)
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