Europe Cautious on Russia Sanctions Ahead of Summit

* EU leaders meet on Thursday to discuss next steps on Russia

* U.S. pushing for sanctions against Moscow, Europe more cautious

* Germany's Merkel urges mediation to resolve Ukraine crisis

* If Russia does not change course, EU sanctions possible

By Luke Baker

BRUSSELS, March 5 (Reuters) - European leaders are under pressure to match the United States in imposing sanctions on Russia over Ukraine. But splits in the European Union, with many countries either close to Russia or reliant on its energy, means EU-U.S. unity is unlikely.

The EU has given Russian President Vladimir Putin until Thursday to reverse course over Crimea or face sanctions, which could include visa and travel bans, the freezing of Russian assets abroad and other political and economic steps.

At the same time, diplomatic energy is being deployed to try to get Putin to accept monitoring on the ground in Crimea and broader mediation with Ukraine, possibly via the Vienna-based Organization for Security and Cooperation in Europe.

EU leaders will meet in Brussels on Thursday to decide on the next steps, but diplomats and EU officials say it is unlikely that there will be agreement among all 28 member states for any hard or far-reaching measures against Russia.

Under EU rules, unanimity is required to impose sanctions.

"I'm not convinced leaders can go very much further," said one EU official involved in preparations for the summit.

"If you are arguing for de-escalation, how do you achieve that if you escalate via sanctions? There's a desire among major member states to avoid measures that might provoke."

Finnish Prime Minister Jykri Katainen, whose country shares a 1,300 km (800 mile) border with Russia and understands the Russian mindset after past wars, said mediation was preferred.

"Any sanctions must be looked at only if the negotiations won't proceed," he said. "Sanctions always have a negative impact for the ones that launch them, so they must be carefully evaluated. It is likely there will be counter-sanctions."

MOSCOW LEVERAGE

The most influential country in the debate is Germany, which has vast business and trade ties with Moscow, including importing nearly a third of its gas from Russia.

Chancellor Angela Merkel has been the most forthright among EU leaders in advocating mediation, a position backed to varying degrees by France, Britain, the Netherlands and Italy - five of the largest and most powerful EU member states.

While Merkel has not ruled out sanctions - and EU foreign ministers have agreed that in the absence of "de-escalating steps" by Russia they will consider "targeted measures" - she would rather rely on dialogue to ease tensions.

The stakes are high. France has a deal to sell warships to Russia that it is so far not prepared to cancel, London's banks have profited from facilitating Russian investment, and German companies have $22 billion invested there in Russia.

For its part, Britain was embarrassed on Monday when photographers took pictures of an official taking documents into a meeting with Prime Minister David Cameron showing UK opposition to restrictions on Russian access to London.

Britain said the documents were no guide to the line it might take on sanctions, but it was an indication of the grey area that exists in Europe, far different from the black-and-white approach in Washington.

With Russia supplying nearly a third of Europe's oil and gas, Moscow holds a degree of leverage it could never hope to exert on the United States, which is largely energy independent.

Add to that the close historical or business ties that exist between Moscow and countries such as Cyprus, Italy, Bulgaria and Hungary, and it quickly becomes clear that securing EU unanimity on sanctions may be impossible.

SANCTIONS BLOWBACK

Even the decision by the G7 nations to suspend preparations for the G8 summit in Sochi in June - a move to isolate hosts Russia - was not uniformly backed in private: diplomats said Italy had reservations about it.

Putin knows the pressure he can bring to bear on Europe, and yet is also aware that Europe is far and away Russia's largest trading partner and the biggest buyer of its energy.

While Moscow has threatened retaliation against the United States and Europe if they impose sanctions, Putin has also been quick to talk down the threat of an economic escalation.

"It's not necessary to add to the difficult situation," he said on Wednesday. "It is not necessary to whip things up and place political considerations on top of issues of economic cooperation."

Another factor playing on the minds of EU officials is what to do if sanctions are imposed. The quality of sanctions depends on the precision with which the legal net is drafted. In the case of EU sanctions on Iran, that net was steadily unpicked.

U.S. officials have indicated they are considering sanctions on Russia banks, in much the same way measures were imposed on Iranian banks over the country's nuclear programme.

The EU's history there is unpalatable: it followed the U.S. and imposed sanctions on a number of Iranian banks. But some of the banks sued in the European courts and won because the EU could not produce sufficient evidence.

It is an experience the EU would prefer not to repeat. (Additional reporting by Justyna Pawlak in Brussels and Jussi Rosendahl in Helsinki; Writing by Luke Baker; Editing by Giles Elgood)