In a joint statement, French President Francois Hollande and German Chancellor Angela Merkel also urged Ukraine's security forces to stop their offensive on rebel-held positions in the run-up to the planned May 25 presidential poll.
The warnings suggested the West might soon move to broaden its sanctions regime to include whole sections of the recession-threatened Russian economy.
But the call for the pro-Western government in Kiev to roll back its military action echoes a similar statement by Russian President Vladimir Putin on Wednesday, who set that as his condition for backing the presidential election.
"If the internationally recognised presidential elections do not take place on May 25, this would destabilise the country further. France and Germany believe that in this case, appropriate consequences should be drawn," Hollande and Merkel said, indicating tougher sanctions.
Paris and Berlin said "proportionate" force should be used to protect people and buildings as Kiev battles to wrest back control of more than a dozen towns and cities in eastern Ukraine held by pro-Russian insurgents.
However, they stressed that "the Ukrainian security services should refrain from offensive actions before the election".
The two leaders also called for a "visible" withdrawal of Russian troops from the Ukrainian border after NATO disputed Putin's claims he had pulled back his estimated 40,000 servicemen.
Ukraine's interim president Oleksandr Turchynov said that Kiev was "ready for negotiations" with representatives from the eastern region but "not terrorists whose mission is to destroy the country".
He said voting for independence would be a "step into the abyss" for these regions and lead to the "total destruction" of the economy there.
But the head of the separatists in the flashpoint eastern town of Slavyansk, Vyacheslav Ponomaryov, told reporters that "if the junta (the Ukrainian government) doesn't withdraw its troops, there will be no discussions".
The crisis "for now" would not prevent France selling two Mistral warship to Russia, Hollande said.
- 'Illegal' referendums planned -
Meanwhile, preparations were in full swing for the disputed referendums in the two eastern regions of Donetsk and Lugansk, home to 7.3 million of Ukraine's total population of 46 million.
Merkel and Hollande dismissed the referendums as "illegal", amid Western fears they will hasten the break-up of Ukraine and could lead to all-out civil war on Europe's fringes.
Voters will be asked if they support the creation of two independent republics that many see as a prelude to joining Russia, as happened in Crimea.
"I think that the turnout will be 100 percent," Ponomaryov told reporters in Slavyansk.
Immediately after the referendum, "the Republic of Donetsk will begin to function" and cultivate "friendly relations" with Russia, he added.
But another rebel leader, Roman Lyagin from Donetsk, said: "If the answer is yes, it does not necessarily mean that we will be joining Russia."
A poll released Thursday by the Pew Research Centre in the United States suggested 70 percent of Ukrainians in the east want to stay in a united country, while only 18 percent back secession.
In a sudden about-face Wednesday, Putin called on the rebels to postpone the referendums to allow dialogue to ease the worst East-West crisis since the Cold War.
But the insurgents immediately snuffed out the brief glimmer of hope, vowing to press ahead with the votes.
One rebel manning barricades in Donetsk where there was a sign reading "the referendum is the will of the people", told AFP his job was to stop pro-Kiev "provocateurs" from spoiling the vote.
"We are going to kill them, we are going to cut them, they are bastards. We are going to kill them and hang them from the lamp posts," said the man, who gave his name as Nikolai.
Underscoring the tensions, rebels briefly detained a group of Red Cross staff in Donetsk, believing them to be spies.
Britain's Foreign Secretary William Hague said that recent events showed Putin had lost his grip on the Ukrainian situation.
Putin "seems to have unleashed forces that he cannot control. Armed thugs with modern weapons are stirring old tensions and stoking new hatreds," Hague told The Daily Telegraph.
In a sign that the referendum was testing nerves all along Europe's eastern edge, Bucharest demanded explanations from Moscow after Deputy Prime Minister Dmitry Rogozin tweeted he would respond to a Romanian airspace ban by returning in a TU-160 strategic bomber.
"A Russian Deputy Prime Minister threatening to use a strategic bomber is a very serious threat in the current regional context," Romania's foreign office said in a statement.
- Burning barricade -
On the ground in Ukraine, the situation remained combustible as the southern city of Mariupol observed a day of mourning for up to 21 people killed in clashes on Friday between Ukrainian authorities and pro-Russian separatists.
An AFP reporter in Mariupol said rebels set alight a captured Ukrainian army armoured vehicle, causing the ammunition inside to explode.
A crowd of several hundred pro-Russians had gathered around the town hall and smoke billowed from a barricade of burning tyres.
Interior Minister Arsen Avakov said the chief of the city's police force had been captured and snipers had been active during Friday's violence, which occurred as Ukraine commemorated the Soviet victory over Nazi Germany in World War II.
He put the death toll from the near-two-hour combat at 20 rebels and one policeman, sending the death toll from recent unrest to more than 100.
Some 14 troops have also been killed and 66 servicemen wounded in Ukrainian army assaults on the rebels.
The fighting has also claimed the lives of more than 30 insurgents.
Clashes that resulted in a horrific inferno in the southern port city of Odessa last week claimed another 42 lives, most of them pro-Russian activists.
