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But he said the EU had to take tough action to counter what he called "the most serious crisis in Europe this century."
"If you are going to stand for something, if you’re going to stand up to aggression, you have to look at, you have to consider, all and every one of those areas."
Merkel said if Russia fails to stop its destabilizing measures in Ukraine, "then we will see a far-reaching change in our relationship with Russia, which can also include a broad array of economic measures."
"We don’t wish for that to happen," she added.
Russia is Europe’s third-largest trading partner and its biggest gas and oil supplier. EU exports to Russia in 2012 totaled 123 billion euros ($170 billion), and European banks have about 200 billion euros in outstanding loans to Russia.
The Obama administration restrictions target a number of unidentified people and entities accused of threatening Ukraine’s sovereignty and borders.
And like the raft of EU measures, the U.S. sanctions are flexible: The penalties will increase if Russia continues its aggressive policies but also could be ratcheted down if Moscow pulls back its troops in Crimea and recognizes Ukraine’s new government.
The United States had already suspended talks on an investment treaty and threatened further steps. NATO on Wednesday suspended most of its meetings with Russian officials, halting military cooperation and deciding to review all aspects of its relationship with Moscow.
In a symbolic victory in the tussle over Ukraine’s future allegiances, the EU leaders agreed to swiftly sign a wide-ranging political association agreement as hoped for by Kiev’s new government, cementing closer ties with Europe.
Merkel said the agreement will now be signed "very fast," and Cameron called it a "significant decision." Leaders hope to sign the deal even before the Ukrainian elections planned for May.
Ukraine’s ousted President Viktor Yanukovych in November walked away from signing that agreement and chose a bailout loan package from Russia instead, which fuelled the protests that eventually led to the ouster of his government.
A free-trade part of the agreement won’t be signed yet, but the EU decided to unilaterally grant Ukraine the financial advantages deriving from it to help boost its ailing economy until the full deal can be signed.
The EU proposed a $15 billion aid package for Ukraine on Wednesday. The U.S. has pledged $1 billion and is working on a more comprehensive package, in coordination with the EU and the International Monetary Fund as Kiev is running out of cash.
Lithuanian President Dalia Grybauskaite underscored fears among Moscow’s closest neighbors as she entered the summit.
"Russia today is dangerous," she insisted. "After Ukraine will be Moldova, and after Moldova will be different countries."
Associated Press writer Angela Charlton contributed reporting.
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