Merkel asks Putin to free EU hostages in Ukraine

Her press service said she "reminded Putin of Russia's responsibility as an OSCE member state and appealed for him to fulfill this responsibility".

Her spokesman, Steffen Seibert, added that the kidnapping is a "totally unacceptable … criminal act".

But the Kremlin statement noted that Putin "stressed that the most important thing now is to withdraw all military units from the south-eastern parts [of Ukraine], stop the violence, and immediately start a national dialogue that would involve all regions and all political forces within the framework of a constitutional reform".

Rebels in Sloviansk, in eastern Ukraine, are holding 11 monitors sent by the OSCE, a Vienna-based multilateral body.

They call the group – which includes four Germans, a Czech, a Dane, a Pole, and four Ukrainians – "prisoners of war" and deny Western claims that they and other separatists take orders from Russia.

Amid the high-level diplomacy, the situation on the ground in Sloviansk escalated on Friday morning (2 May), with reports that Ukrainian forces exchanged fire with rebels in an operation to retake the town.

Merkel will on Friday meet with US leader Barack Obama in Washington to discuss the next steps on the crisis.

Her press service underlined that "should Russia show no signs toward a de-escalation of the situation in Ukraine, [the EU and US] could jointly adopt third stage penalties as an answer".

The "third stage" refers to economic sanctions against Russian energy, banking, high-tech, and arms industries to come on top of existing blacklists of Russian officials, oligarchs, politicians and security chiefs.

White House spokesman Jay Carney told press on Thursday that Putin's plan to visit Crimea, a Ukrainian region which he annexed in March, on 9 May will not trigger the move.

But he noted that "should Russia engage in further provocations – up to and including potentially a military intervention, direct military intervention across the Ukrainian border – there will be further severe economic costs to Russia as a result."

US and EU companies with business interests in Russia are urging politicians to hold back.

In Germany, corporate giants Basf, Siemens, Volkswagen, Adidas, and Deutsche Bank are leading the anti-sanctions lobby. "It's up to politicians and historians to determine the efficacy of boycotts, but I have my doubts," Basf CEO Kurt Bock, whose firm has extensive ties with Russia's Gazprom, recently told German daily Suddeutsche Zeitung.

German-Russian trade accounts for €76 billion a year. There are 6,200 German firms active in Russia and Berlin has said stage three sanctions could lead to the loss of 300,000 German jobs.

For his part, Carney said the political stakes are too high for leaders to bow to business interests. "There's no question there would be an impact if such steps were taken, both in the United States and around the world. But the costs would be far greater for Russia," he noted on Thursday.

But US senators from the opposition Republican party believe that Merkel, whose decisions shape EU foreign policy, is taking too soft a line.

"We certainly need a clearer, more targeted and more united position," senator Jeff Sessions, who attended a dinner with Merkel on Thursday night in the US capital, told the AFP news agency.

Senator John McCain, who has visited Kiev several times to show support for the pro-Western authorities, added that the German "industry lobby … might as well sit in the [German] federal government. It's a shame".