Aug. 26 (Bloomberg) -- The U.S. and European Union condemned Russia's recognition of Georgia's two breakaway regions, which celebrated the move as increased international tensions drove down the ruble and Russian stocks.

President George W. Bush urged Russia to ``reconsider this irresponsible decision,'' which he said was ``inconsistent'' with United Nations Security Council resolutions on Georgia's borders that Russia had supported.

Russian President Dmitry Medvedev called his decision an ``obvious'' move to protect his country's borders. Russia's acceptance of the pro-Moscow autonomous regions' independence -- years after they first requested recognition -- followed its military drubbing of Georgia this month after leaders in Tbilisi tried to retake South Ossetia by force.

Today's action surprised some analysts, who had said beforehand that Russia might instead continue to use the threat of recognition as a bargaining chip in negotiations over the crisis. The move also risks emboldening separatists within Russia's borders, including nearby Chechnya, where it has twice fought insurrections since the fall of the Soviet Union in 1991.

``The move significantly raises the temperature in this crisis,'' said Charles Kupchan, fellow at the Council on Foreign Relations in Washington. ``There is still plenty of room for diplomacy. But Moscow is clearly intent on taking an aggressive posture, following military excess with diplomatic excess.''

Kosovo Response

By recognizing the regions, Medvedev and Prime Minister Vladimir Putin are engaging in tit-for-tat gamesmanship with the West over Kosovo's February declaration of independence, which was backed by the U.S. and much of Europe and opposed by Russia as an illegal affront to Serbia, its ally. Georgia is a pro-West democracy coveted by the U.S. and Europe because it controls a Caspian Sea oil pipeline that bypasses Russia.

Russia's ``message is, `You do it in Kosovo, we'll do it in South Ossetia and Abkhazia,''' said Spyros Economides, senior lecturer at the London School of Economics. ``This shows that Russia is going to pursue its interests and there isn't much the West can do to stop them. They're saying, `you can't simply make the rules in this international game.'''

Medvedev told the BBC, in one of a series of interviews with foreign media outlets, that the Georgian situation is a ``special case'' that can't be compared to Kosovo.

Kosovo Comparison

In an article published in the Financial Times, the Russian president made a link to Kosovo. He said his government had argued that it would be ``impossible'' after its recognition to tell Abhkazians and Ossetians that the same path wasn't ``good'' for them. ``In international relations, you cannot have one rule for some and another rule for others,'' he wrote.

Some analysts said the move may trigger economic retaliation against Russia. Putin said this week Russia should suspend some agreements related to its request to join the World Trade Organization after NATO restricted contacts with Moscow to protest its incursion into Georgia.

``It opens the door for possible sanctions against Russia by Europe or the U.S.,'' UniCredit SpA analyst Vladimir Osakovsky said by telephone in Moscow. ``The effect of this decision on the economy will be determined by the scale of the West's reaction.''

Top U.S. officials, including Secretary of State Condoleezza Rice and Defense Secretary Robert Gates, conferred among themselves today and with allies on options for a response, according to the State Department. The Group of Seven industrialized nations is considering a statement on the crisis, State Department spokesman Sean McCormack said.

Scenes of Celebration

Residents of South Ossetia and Abkhazia greeted Medvedev's announcement by firing guns into the air in scenes broadcast on Russian state television. In Sukhumi, the capital of Abkhazia, motorists drove through the city holding Abkhaz flags. In the South Ossetian capital of Tskhinvali, Russian flags were hung from buildings.

``We've been working toward this for nearly 20 years, defending our legal right to live independently on the field of battle and in international forums,'' South Ossetian leader Eduard Kokoity said in a statement. ``I'd like to hope that other countries will follow Russia's wise and noble decision.''

At the United Nations, Russian Ambassador Vitaly Churkin rebuffed U.S. assertions that his government was violating UN resolutions.

Georgia's ``use of force against South Ossetia completely dashed all those resolutions and created a new reality,'' Churkin told reporters. He said Russia intends to open diplomatic relations with Abkhazia and South Ossetia and doesn't plan on annexing them.

`No Legal Force'

Georgian President Mikheil Saakashvili, a U.S. ally, said the declaration had ``no legal force'' and renewed his call for his country's ``speedy'' entry into the NATO military alliance, a move Russia has called a threat to its security.

Russian stocks and the ruble tumbled on the news, which came a day after the country's parliament unanimously backed the move. The dollar-denominated RTS Index of shares fell 4.2 percent to 1,579.12, extending its third-quarter drop to 31 percent. The ruble-denominated Micex Index fell to its lowest since September 2006. The currency declined as much as 1.3 percent to 24.7676, the lowest since Feb. 7.

Net capital outflows of investor funds from Russia may have reached about $2 billion in the first two weeks of August, said Katya Malofeeva, chief economist at Renaissance Capital in Moscow.

`Main Question'

``The main question is whether this means the beginning of a serious standoff between Russia and the West,'' Malofeeva said. ``Large-scale'' capital outflows are unlikely until we see what happens next, she said.

Medvedev called on other nations to follow his lead, telling CNN that his government was ``obliged to protect its interests along its entire perimeter.'' In an interview with state broadcaster Russia Today, Medvedev said his decision to recognize the two regions ``fully coincides with international law.'' Countries that ``want to preserve good relations with Russia'' will understand his reasons, he said.

South Ossetia and Abkhazia fought inconclusive independence wars against Georgia in the early 1990s, after which they became autonomous protectorates of Russia, which stationed peacekeepers in both regions.

South Ossetia, about half the size of Puerto Rico, has a population of about 70,000. Russian officials say 2,100 civilians died in recent fighting the region, which is connected to Russia's North Ossetia region via a tunnel through the Caucasus Mountains.

Georgians Fled War

Slightly larger than the U.S. state of Delaware, Abkhazia has about 200,000 people. Georgia says about 250,000 ethnic Georgians fled a war there in the early 1990s and haven't been allowed to return.

The war and its aftermath marked a new source of disagreement between the U.S. and Russia, which have clashed over NATO's planned expansion eastward and a U.S. effort to install a missile-defense shield in former Soviet bloc countries Poland and the Czech Republic, as well as Kosovo.

The U.K. Foreign Office ``categorically'' rejected recognition of the breakaway regions, while Italy and France expressed regret at Russia's action. German Chancellor Angela Merkel described it as ``absolutely unacceptable.'' Swedish Foreign Minister Carl Bildt called the move a ``deliberate violation of international law.''

Avoiding `Cold War'

Saying he didn't want another ``Cold War,'' Medvedev told France's TF1 television he wasn't ready to cede ground.

``The ball is in the Europeans' court, and if they want a worsening of relations, they'll get it,'' he said. ``But if they want to maintain strategic relations, which is absolutely in the interests of Russia and Europe, then in my view everything will be fine.''

French Foreign Minister Bernard Kouchner said on France 2 television, ``We fear a war and we don't want one,'' according to Agence France-Presse.

Russia and Georgia have had tense relations since 2003, when Saakashvili came to power in the non-violent ``Rose Revolution,'' steering his country closer to the West. NATO announced in April that Georgia and Ukraine, another former Soviet Republic, will eventually join the alliance without giving a time frame.

Medvedev said ``a peaceful solution to the conflict was not in Tbilisi's plans. The Georgian leadership methodically planned for war.''

A European Union-brokered Aug. 16 cease-fire that ended fighting called for Georgia's forces to return to their bases and for Russian troops to withdraw to their location before the conflict began.

``The continued presence of the Russian army in Georgia will most likely now be viewed as Russian occupation,'' said UniCredit's Osakovsky. ``This could trigger personal or business restrictions against government officials or companies.''

To contact the reporters on this story: Lyubov Pronina in Sochi via the Moscow newsroom at 7732 or lpronina@bloomberg.net; Sebastian Alison in Moscow at Salison1@bloomberg.net

Last Updated: August 26, 2008 16:26 EDT