David Cameron has warned Vladimir Putin that he faces "a fork in the road" in Russia's future relationships with the West because of the failure to de-escalate the crisis in Ukraine.
The Prime Minister confronted Mr Putin over Russia's interference in its smaller neighbour in a face-to-face conversation on the fringes of the G20 summit in Australia which Downing Street described as a "robust exchange".
Mr Cameron said the Russian President faced a choice between restoring relations with the rest of the world by observing the terms of September's peace agreement in Minsk or risking further sanctions by continuing to destablise Ukraine.
European leaders are to discuss the situation in Ukraine with US President Barack Obama tomorrow, and EU finance ministers will meet on Monday to consider the case for extending sanctions.
The G20 summit, whose official agenda focuses on economic growth and jobs, has developed into a showdown between Mr Putin and other world leaders.
The Russian President stoked tensions by deploying four warships to the Coral Sea, off Australia's eastern coast, in a move described by summit host Tony Abbott as part of a "regrettable pattern" of Russian military assertiveness designed to recreate the "lost glories" of the Soviet Union.
Mr Cameron said Mr Putin's exercise of "international machismo" should not be allowed to distract from events in Ukraine, where violence has continued despite the Minsk ceasefire.
Following their 50-minute meeting, a Downing Street source said: "The Prime Minister was clear at the start of the Ukraine discussions that we face a fork in the road, in terms of where we go next.
"We can either see implementation of the Minsk agreement and what follows from that in terms of an improvement of relations. Or we can see things go in a very different way in terms of relations between Russia and the UK, Europe and the US."
According to a Downing Street source, Mr Putin continued to insist that Russia has no troops in eastern Ukraine and indicated he was supportive of the deployment of international monitors and drones to check on movements of soldiers or weapons across the border into Ukraine.
A Kremlin spokesman said the President had given "quite detailed explanations" of recent events in south-eastern Ukraine.
The President's spokesman said Mr Putin and Mr Cameron discussed "the fundamental causes of the current breakdown in relations" between Russia and the West and "noted the interest in restoration of those relations" and the need for "effective measures in resolving the crisis in Ukraine that will contribute to the abandonment of confrontation attitudes".
But Downing Street made clear that Britain's response will depend on developments on the ground in eastern Ukraine.
Mr Cameron said: ''We're heading at the moment in the wrong direction. What we need is for Russia to change track and to stop destabilising Ukraine, to respect the Minsk agreement, to recognise that there's only one legitimate government in Ukraine - and that's the elected government - and to allow that country to make its own choices about its own future. That's not the direction we're heading in.
''It's important to warn of the dangers if Russia continues to head in the other direction.
''If that path continues and if that destabilisation gets worse, the rest of the world, Europe, America, Britain, will have no choice but to take further action in terms of sanctions.''
Mr Putin has received a frosty welcome from other world leaders in Brisbane, and is reported to be planning to leave earlier than scheduled, missing tomorrow's official lunch of G20 leaders.
Canada's Prime Minister Stephen Harper took his proffered hand only reluctantly, telling him: "Well, I guess I'll shake your hand, but I only have one thing to say to you: you need to get out of Ukraine."
And Australian PM Mr Abbott said he had told Mr Putin that "Russia would be so much more attractive if it was aspiring to be a superpower for peace and prosperity, if it was trying to be a superpower for ideas and for values, instead of trying to recreate the lost glories of tsarism or the old Soviet Union".
European Council president Herman van Rompuy said recent military escalation in Ukraine was "of utmost concern" and warned that the EU would " continue to use all diplomatic tools, including sanctions, at our disposal".
Mr van Rompuy added: "Russia still has the opportunity to fulfil its Minsk commitments and choose the path of de-escalation, which could allow sanctions to be rolled back. If it does not do so, however, we are ready to consider additional actions."
Any further EU sanctions agreed on Monday are expected to target individuals responsible for the recent round of disputed elections in two enclaves of eastern Ukraine, which resulted in victory for pro-independence rebels but have not been recognised outside Russia. Broader sanctions targeting sectors of the Russian economy like energy, defence and banking are thought likely to be held in reserve.
Mr Cameron said sanctions imposed previously by the EU and US were already having an impact on Russia.
''Clearly President Putin believes very strongly in the history and identity of the nation of which he is president and we have to understand that, but at the same time we have to be very clear that ... you're not serving that country if, at the end of the day, the result is an economy under pressure, banks that can't raise money, a falling rouble, a stock market under pressure," said the PM. "In the end I don't believe what is happening is in Russia's best interests."
Mr Cameron and Mr Putin also discussed the continuing civil war in Syria and the threat from the Islamic State extremist group - also known as Isil or Isis - in the country and neighbouring Iraq.
They agreed to hold meetings at official level to discuss the prospects of establishing a national unity government in Syria, though there was no indication of Mr Putin backing away from his support for President Bashar Assad, who the UK believes should play no part in a future administration.