* New US sanctions target Putin allies
* Russian shares and rouble fall
* Russia warns it will hit back
By Steve Holland and Elizabeth Piper
WASHINGTON/MOSCOW, July 17 (Reuters) - President Barack Obama imposed the toughest U.S. sanctions yet on Russia, striking at the heart of Vladimir Putin's powerbase by targeting companies closest to him over what Washington says is Moscow's failure to curb violence in Ukraine.
By imposing penalties on Russia's largest oil producer Rosneft, its second largest gas producer Novatek and its third largest bank Gazprombank, Washington targeted Putin's allies, many of whom have become wealthy during his tenure.
Moscow denounced what it called "primitive" revenge for events in Ukraine, and pledged to retaliate with sanctions of its own. Putin said the U.S. sanctions would damage American energy companies and bring relations to a "dead end."
The sanctions, which in effect close medium- and long-term dollar funding, were also put on Vnesheconombank, VEB, which acts as payment agent for the government, and eight arms firms, including the producer of the Kalashnikov assault rifle.
However, the sanctions did not freeze the big companies' assets, close off the short-term funding they need for day-to-day operations, or stop U.S. firms doing business with them. Several were quick to say it was business as usual. But Russia's rouble-traded stock market and the rouble tumbled on opening.
After stabilising, Rosneft and Novatek were still each down around 5 percent. The MICEX index was off more than 2 percent.
The measures mean that Washington has moved far further to punish Russia than its EU allies, who collectively do 10 times as much trade with Russia as the United States and depend on Moscow for natural gas. Nevertheless, the European Union also said it was imposing new sanctions and would draw up a list of targets by the end of the month. It will block new loans to Russia through two development banks.
Moscow said the European Union had "succumbed to the blackmail of the U.S. administration" to follow Washington in imposing sanctions.
The sanctions show a new willingness to act by Western countries over a crisis that has escalated in recent weeks. Hundreds of people have died in fighting between Ukrainian troops and heavily armed pro-Russian separatists who have declared independent "People's Republics" in two provinces.
Moscow denies supporting the rebellion, but many of the separatist fighters and their main leaders are from Russia. Kiev says they have been bringing heavy weapons across the border and that Russia shot down one of its planes on Monday.
Putin, who annexed Ukraine's Crimea peninsula in March and has referred to southern and eastern Ukraine as "new Russia", had appeared keen in recent weeks to tamp down the worst confrontation with the West since the Cold War, pulling back tens of thousands of troops from the frontier.
But in recent days, Washington and Brussels say, he has again sent some 12,000 troops to the frontier and kept the border open for rebel fighters and arms.
EUROPE ON BOARD?
Obama, who warned of more sanctions if Russia did not take concrete steps to ease the conflict, said Putin had so far failed to take steps needed to resolve the crisis peacefully.
"We have emphasized our preference to resolve this issue diplomatically, but that we have to see concrete actions and not just words that Russia, in fact, is committed to trying to end this conflict along the Russia- Ukraine border," he said.
The sanctions show how difficult it can be for Western countries to punish Russia without causing wider economic harm. Russia is the world's largest producer of oil and, after the United States itself, second largest producer of natural gas.
Rosneft is the biggest oil producer in the world that is listed on a stock market. The firm alone produces around 4 percent of the world's oil, more than any OPEC country apart from Saudi Arabia. Any measure that seriously affected its production could cause a global energy crisis. There was no sign of one on Thursday, with oil prices only fractionally higher.
Still, sanctions can have a strong indirect affect on Russia's economy by forcing companies to reconsider investments there because of future risk. Previous rounds of U.S. and EU sanctions targetted only a few dozen individuals and small firms but helped encourage billions of dollars in capital flight that hurt Russia's shaky economy.
Adding Rosneft to the list shows that Russia's biggest firms are now potentional targets. It had sales of $40 billion in the first quarter, about 8.6 percent of Russia's GDP.
Rosneft, headed by Igor Sechin, Putin's close friend since the 1990s, supplies virtually every major international oil company and has joint projects with many of them. It accounts for around a quarter of production for BP, which owns 20 percent of it. It is in the midst of a deal to buy the oil trading assets of U.S. investment bank Morgan Stanley and has several big oil projects in Russia with Exxon Mobil.
Sechin, travelling with Putin in Brazil, said the sanctions were "unjustified, subjective and unlawful, because the company has no role in the Ukraine crisis".
Novatek was not available for comment. VEB declined to comment. Gazprombank said the stability of its operations and finances were not affected.
Russia's biggest company, gas export monopoly Gazprom , was not included on the sanctions list. It would be harder to target, since many European countries rely on its gas.
While Rosneft can still sell oil, sanctions could have an effect on its oil-related finance arrangements, worth around $15 billion, with companies including BP and Glencore.
(For more details on the sanctions, see http://1.usa.gov/1kx0sxT) (Additional reporting by Jeff Mason, Patricia Zengerle and Phil Stewart in Washington, Adrian Croft in Brussels and Josephine Mason, Edward McAllister, and Jonathan Leff in New York; and by Katya Golubkova and Polina Devitt in Moscow, Writing by Elizabeth Piper and Peter Graff, Editing by Timothy Heritage)