UK's Cameron wants tougher EU Russia sanctions, defence sale ban

(Re-leads with Cameron, adds quotes, writes through)

By Kylie MacLellan and William James

LONDON, July 21 (Reuters) - The European Union should impose harder-hitting sanctions on Russia after the downing of a Malaysian airliner in Ukraine, British Prime Minister David Cameron said on Monday, advocating an EU ban on future sales of military equipment to Moscow.

The 28-nation EU has been under pressure from the United States and Ukraine to take a harder line on Russia, but some EU governments are wary of potential retaliation from Moscow, the bloc's biggest energy supplier.

Speaking in parliament before a meeting of EU foreign ministers on Tuesday, Cameron said Europe should impose harsher sanctions on Russia unless there was a "radical" change in its behaviour towards Ukraine following the downing of MH17 last week with the loss of 298 lives.

"It is time to make our power, influence and resources felt," Cameron said, arguing the time had come to move on to so-called "tier three" sanctions, a set of tougher measures that would target specific sectors of the Russian economy.

"Russia cannot expect to continue enjoying access to European markets, European capital, European knowledge and technical expertise while she fuels conflict in one of Europe's neighbours," said Cameron.

Future (LSE: FUTR.L - news) steps could include freezing the assets of some of Russian President Vladimir Putin's closest allies, Cameron said, referring to them as "cronies and oligarchs".

He said the weight of evidence increasingly indicated that the Malaysian Airlines plane had been shot down by an SA-11 missile fired by pro-Russian separatists and called on Putin to halt the flow of weapons and troops to Ukraine.

He also called for EU countries to stop selling defence equipment to Russia and questioned France's plan to sell Mistral helicopter carriers to Moscow. Fulfilling such an order would be unthinkable in Britain, he said.

"We need to put the pressure on with all our partners to say that we cannot go on doing business as usual with a country when it is behaving in this way," said Cameron.

France has previously said it will press ahead with the deal despite unease about the transaction from the United States.

Britain, Germany and France agreed on Sunday they should be ready to ratchet up sanctions on Russia when European foreign ministers meet in Brussels on Tuesday.

However, EU diplomats have said Tuesday's meeting in Brussels is not expected to go much further than speeding up the imposition of already agreed "tier two" sanctions which target individuals.

Earlier on Monday, finance minister George Osborne said Britain was prepared to take an economic hit from imposing further sanctions against Russia because the costs of not acting would be greater.

"Think of the economic hit ... of allowing international borders to be ignored, of allowing airlines to be shot down - that's a much greater economic hit for Britain and we're not prepared to allow that to happen," Osborne told BBC Radio. (Additional reporting by Andy Bruce; Editing by Andrew Heavens and Andrew Osborn)