* Biden says in Kiev that Russia must act to defuse crisis
* Effects of sanctions can be minimised - Medvedev
* Russia trying to undermine Ukraine election - Kiev
* U.S. Vice President tells Ukraine to tackle corruption
By Jeff Mason and Darya Korsunskaya
KIEV/MOSCOW, April 22 (Reuters) - U.S. Vice President Joe Biden told Russia on Tuesday that "time is short" for action on defusing the crisis in eastern Ukraine, but Moscow said it could handle any tougher economic sanctions the West might impose.
Speaking on a visit to Kiev, Biden called on Moscow to pull back troops built up on Ukraine's borders and to "stop talking and start acting" on getting Russian separatists who have seized control in eastern towns and cities to disarm.
The United States has repeatedly warned Russia it faces "mounting costs" if it fails to ensure full implementation of an international agreement struck last week on calming the crisis. This stipulates the rebels must leave the government buildings that they have occupied in the past two weeks.
Russia has in turn accused the Ukrainian government of stirring up the trouble and told Washington it must influence Kiev to prevent "hotheads" from provoking a bloody conflict.
Biden, however, put the onus on Moscow. "We've heard a lot from Russian officials in the past few days. But now it's time for Russia to stop talking and start acting," he told a news conference. "We will not allow this to become an open ended process. Time is short in which to make progress."
Russia's annexation of Crimea from Ukraine and the eastern rebellion have deepened the worst East-West crisis since the Cold War, and Biden demanded the removal of Russian forces near Ukraine's frontier which Moscow insists are merely on exercises.
"No nation should threaten its neighbours by amassing troops along the border. We call on Russia to pull these forces," Biden said after meeting Ukrainian Prime Minister Arseny Yatseniuk.
Moscow denies it is orchestrating the militants, who say they want the chance to join Crimea in becoming part of Russia following the overthrow of Moscow-backed president Viktor Yanukovich after months of street protests in Kiev.
But Washington, which signed last week's accord in Geneva along with Moscow, Kiev and the European Union, has said it would decide "in days" on additional sanctions if Russia does not take steps to implement the agreement.
In Moscow, Prime Minister Dmitry Medvedev said the country could deal with tougher measures if necessary.
"We shan't give up on cooperation with foreign companies, including from Western countries, but we will be ready for unfriendly steps," he told parliament.
"I am sure we can minimise their impact," he said. "We will not allow our citizens to become hostages of political games."
So far the United States and EU have imposed visa bans and asset freezes on only a limited number of Russians over the annexation of Crimea last month.
Medvedev said some Russian banks had been shut out of international payments systems, calling this "a violation of existing agreements" which "must not go unpunished".
The EU has been more cautious than the United States in imposing sanctions, with some member states worried about antagonising a country which supplies a third of Europe's gas.
Both sides stressed on Tuesday they wanted to depend less on the other over energy.
Medvedev said Russia was more interested than ever in diversifying its gas exports and described talk of Europe importing U.S. gas as a substitute as "a bluff".
Putting the counter argument, Britain said leading Western economies had to tackle the issue when the Group of Seven nations meet next month, noting how Russia has cut off supplies to Ukraine during past disputes over prices.
"It can't be right for Russia to hold individual countries to ransom," said Energy Secretary Ed Davey. "There have been at least two, if not three, occasions in recent times when Russia has sought to use its energy superpower status in quite an aggressive manner," he said in comments published by The Times newspaper.
During Biden's trip, the United States offered Ukraine a new $50 million aid package to help with economic and political reform. Of this $11.4 million was earmarked for helping with the election to choose a successor to Yanukovich, the White House said in a statement.
While small in relation to Ukraine's huge needs and a $1 billion loan guarantee already signed with Washington, the package serves to show support for the new authorities following the overthrow of the Kremlin-backed Yanukovich in February.
TOUGH WORDS FOR KIEV
Biden also had tough words for Kiev, saying it must deal with the endemic graft that has sapped the economy and public faith in the state. "To be very blunt ... you have to fight the cancer of corruption," he told lawmakers.
Yatseniuk said Russian special forces were operating in eastern Ukraine to undermine the election due on May 25.
"Everything that is now happening in the east and which Russia is supporting is aimed at wrecking the presidential election," he said. "We demand that our Russian neighbours immediately recall their special forces, which are in the east, recall the army from Crimea and turn this shameful page in which Ukrainian territory has been seized by Russian troops."
In Crimea, where Russian-speakers form a narrow majority, voters overwhelmingly backed union with Russia in March in a referendum staged after Moscow forces had already taken control of the Black Sea peninsula.
However, Crimea's minority Tatar community expressed its discontent on Tuesday, accusing Russia of barring its leading political figure from returning home after the annexation.
A Turkic-speaking, Muslim community, long present on the Black Sea, Tatars make up about 12 percent of Crimea's 2 million population. Deported to central Asia on suspicion of aiding Nazi German invaders, they began to return in the 1980s and in large numbers after the collapse of the Soviet Union in 1991.
In an online statement, the community's assembly said Mustafa Dzhemilev, its former chairman and a member of the Ukrainian parliament, had been handed a notice banning him from Russia for five years as he crossed back to mainland Ukraine after a weekend in Crimea. (Additional reporting by Natalia Zinets, Alastair Macdonald and Richard Balmforth in Kiev, Nigel Stephenson in Moscow and William James in London; writing by David Stamp; editing by Giles Elgood)
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