US president Barack Obama has dismissed fears that the Western standoff with Russia over the Ukraine crisis would lead to another Cold War but has warned that if Moscow stays on its course "costs will increase and sanctions will extend". Russia isolation, he warned, would only deepen.

"This is not another Cold War we're entering into," he said in Brussels. "Russia leads no bloc of nations. The US and Nato do not seek any confrontation with Russia."

Dismissing one by one Russia's arguments to justify the invasion of Ukraine and annexation of Crimea, Obama affirmed: "Big countries cannot just simply bully the small.

"Just because Russia has a deep history with Ukraine doesn't mean it has the right to dictate Ukraine's future," he said.

"Russia's leadership is challenging truths that weeks ago seems self-evident. In the 21st century the borders of Europe cannot be drawn with force," Obama told the 2,000-strong audience at an art deco arts centre.

"If we define our interests narrowly, we could look the other way. We face no direct threat, our economy is not deeply integrated with Ukraine. Our people don't face a direct threat."

Obama rejected Russian propaganda claims that Washington was funding or supporting ultra-nationalist movement in Ukraine.

"It's absurd to suggest that America is conspiring with fascists in Ukraine or failing to respect the Russian people," he said. "No amount of propaganda can make right what the world knows is wrong.

"Russia violation of international law and assault on Ukraine's sovereignty and territorial integrity must be met with condemnation, not because we're trying to keep Russia down but because our ideals must be lifted up."

He finished with an impassioned plea to Europe to be more outspoken and involved in sanctioning Russia.

"In this moment, we must meet the challenge to our ideals [of an] international order with strength and conviction," he said. "What kind of Europe, what kind of America, what kind of world will we leave behind?

"I have no doubt that hope will overcome fear, and freedom will continue to triumph over tyranny."

Obama had earlier dismissed Russia as a "regional power" that threatened its neighbours "not out of strength but out of weakness".

Before the speech, Obama had a summit lunch meeting with EU leaders Herman Van Rompuy and José Manuel Barroso followed by a meeting with Anders Fogh Rasmussen.