Nato foreign ministers have agreed to suspend all practical civilian and military co-operation with Russia.
Secretary General Anders Fogh Rasmussen said Russia's annexation of Ukraine's Crimea region was the gravest threat to European security for a generation.
There could be no "business as usual", he added.
He had earlier categorically denied reports that Russia was pulling its forces back from its border with Ukraine.
Moscow is believed to have massed tens of thousands of troops on Ukraine's eastern border in recent days, causing alarm in Kiev and the West.
Foreign ministers from the 28-member Nato bloc, gathering in Brussels for their first meeting since Russia's annexation of Crimea, issued a strongly worded statement in which they condemned Russia's "illegal" annexation of Ukraine's Crimea region.
They agreed to suspend Nato co-operation with Russia in a number of bodies but added that dialogue in the Nato-Russia Council could continue, as necessary, at ambassadorial level and above "to allow us to exchange views, first and foremost on this crisis. We will review Nato's relations with Russia at our next meeting in June".
They are also looking at options including situating permanent military bases in the Baltic states to reassure members in Eastern Europe. Russia's actions in Ukraine have caused concern in Estonia, Latvia and Lithuania, which were part of the Soviet Union during the Cold War.
Nato jets will take part in air patrols in the region later in a routine exercise that analysts say has taken on added significance due to the crisis. Several Nato countries, including the UK, US and France, have offered additional military aircraft.
Separately, the US House of Representatives voted overwhelmingly to back a bill providing aid to Ukraine and imposing certain sanctions against Russia over the annexation of Crimea. The bill now goes to President Barack Obama for signature.