* New US sanctions target Putin allies
* Russian shares and rouble fall
* Russia warns it will hit back (Adds Russian reaction, shares and rouble fall)
By Steve Holland and Elizabeth Piper
WASHINGTON/MOSCOW, July 16 (Reuters) - President BarackObama imposed the toughest U.S. sanctions yet on Russia,striking at the heart of Vladimir Putin's powerbase by targetingcompanies closest to him over what Washington says is Moscow'sfailure to curb violence in Ukraine.
By imposing penalties on Russia's largest oil producerRosneft, its second largest gas producer Novatek andits third largest bank Gazprombank, Washington targeted Putin'sallies, many of whom have become wealthy during his tenure.
The sanctions, which in effect close medium- and long-termdollar funding, were also put on Vnesheconombank, VEB, astate-owned bank that acts as payment agent for the government,and eight arms firms, including the producer of the Kalashnikovassault rifle.
The sanctions did not freeze those four companies' assets,or stop U.S. firms from doing business with them and severalwere quick to say it was business as usual. But Russia'srouble-traded stock market and the rouble tumbled on opening.
Rosneft and Novatek were heavily hit, with both down morethan 5 percent. The MICEX index was off more than 3 percent.
In his harshest words yet about future ties with Washington,Putin said the sanctions would damage U.S. energy companies andbring relations to a "dead end." A Foreign Ministry officialsaid Moscow would hit back in a way that would be "painful" forWashington.
The chief executive of Russia's VTB bank warned ofpotentially devastating consequences for the global financialsystem from sanctions which he called illegal, echoing thesentiment of several Russian business leaders.
"Of course, these sanctions are inappropriate and of coursethey do not correspond to the spirit or the legal standards ofexisting international relations, in particular in the field offinance and banking," Andrei Kostin, whose bank is Russia'ssecond largest, was quoted as saying by Itar-Tass news agency.
"I believe that if we do not take measures to stop suchunilateral actions, we could see devastating consequences forthe global financial system."
EUROPE ON BOARD?
Obama, who warned of more sanctions if Russia did not takeconcrete steps to ease the conflict, said Putin had so farfailed to take steps needed to resolve the crisis peacefully.
"We have emphasized our preference to resolve this issuediplomatically, but that we have to see concrete actions and notjust words that Russia, in fact, is committed to trying to endthis conflict along the Russia- Ukraine border," he said.
Washington said on Wednesday that up to 12,000 Russiancombat forces were back on the border with Ukraine and thatweaponry was crossing over to pro-Russian separatists.
Obama's latest round of sanctions came after closeconsultations with European leaders, who announced aless-ambitious package. The ultimate impact of the U.S.sanctions likely depends on whether the European Union followssuit.
It is the first time the United States has imposed suchnarrowly targeted measures as it seeks to inflict the maximumimpact on Russia, dependent on oil revenues, while avoiding anyimmediate shock to global oil markets or U.S. and EU companies.
Both have already imposed several rounds of sanctions onsenior Russian and Ukrainian officials since the start of thecrisis, prompted when former pro-Moscow President ViktorYanukovich was toppled from power in February and followed amonth later by Russia's annexation of Crimea from Ukraine.
But Russian commentators suggested that many in the EuropeanUnion were forced to support Washington's escalation and thatbusiness would suffer.
"The United States thinks that their policy of 'isolatingRussia' will be payed for not just by themselves but by EUcountries. In Europe, this is very well understood and noteveryone is in agreement," Alexei Pushkov, a Putin loyalist andsenior member of parliament, said on Twitter.
ALLIES IN FOCUS
But the measures put Putin's allies in focus. Rosneft is ledby Igor Sechin, a friend of the Russian leaders since the 1990sand Novatek is run by Gennady Timchenko, who is said bypolitical opponents to have been helped by Putin in creating hisformer Gunvor oil trading empire.
He sold his stake in that company just before another roundof sanctions.
Gazprombank declined to comment.
Sechin, travelling with Putin in Brazil, rounded on thesanctions, saying they were "unjustified, subjective andunlawful, because the company has no role in the Ukrainecrisis".
While not worried by earlier asset freezes and travel bansput on him personally, Sechin is increasingly upset over thesanctions, believing that he has done a lot to U.S. investorsinto Russia.
Rosneft is working with Exxon Mobil Corp on severalbig oil projects in Russia.
Novatek was not available for comment. VEB declined tocomment.
It is not yet clear how large an impact the new measureswill have on Rosneft, which had sales of $40 billion in thefirst quarter, about 8.6 percent of Russia's gross domesticproduct, or the companies it does business with.
The new sanctions would not appear to prevent Rosneft fromselling its oil, but may raise questions about the company'smore than $15 billion worth of oil-related finance arrangementswith companies including BP, which now owns almost afifth of Rosneft, and Glencore.
Morgan Stanley, which is selling the majority of itsglobal physical oil trading operations to Rosneft, declined tocomment.
The sanctions stopped short of targeting Russia's Gazprom, the world's largest natural gas producer and providerof much of Europe's energy supplies. Gazprombank is 36percent-owned by Gazprom. (For more details on the sanctions, see http://1.usa.gov/1kx0sxT) (Additional reporting by Jeff Mason, Patricia Zengerle and PhilStewart in Washington, Adrian Croft in Brussels and JosephineMason, Edward McAllister, and Jonathan Leff in New York; and byKatya Golubkova and Polina Devitt in Moscow, Writing byElizabeth Piper, Editing by Timothy Heritage)
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