In an often angry 65-minute televised national address, Putin railed against Russia's ex-Soviet neighbour Ukraine as a failed state and "puppet" of the West, repeatedly suggesting that it is essentially part of Russia.
He accused authorities in Kyiv of persecuting Russian speakers and of preparing a "blitzkrieg" against the breakaway regions of Donetsk and Lugansk in Ukraine's east.
"As for those who seized and hold power in Kyiv, we demand an immediate end to their military operations," Putin said.
"Otherwise, all responsibility for the possible continuation of bloodshed will be fully on the conscience of the regime in power in Ukraine."
Putin said it was necessary to "take a long overdue decision, to immediately recognise the independence" of the two regions.
Immediately after the speech, state television showed him signing mutual aid agreements with rebel leaders in the Kremlin.
The recognition effectively puts an end to an already shaky peace plan in the separatist conflict, which has rumbled on since 2014, after Moscow annexed Crimea from Ukraine, and has left more than 14,000 dead.
EU 'will react with sanctions'
Russia could now move in troops at the request of separatist officials, or to protect hundreds of thousands of residents who have been granted Russian passports, justifying an intervention as a defence of its citizens.
Ukraine would then either have to accept the loss of a huge chunk of territory, or face an armed conflict against its vastly more powerful neighbour.
The move drew immediate condemnation from the West, with Prime Minister Boris Johnson calling it "a flagrant violation of the sovereignty and integrity of the Ukraine".
EU chiefs Ursula von der Leyen and Charles Michel promised the bloc "will react with sanctions against those involved in this illegal act."
NATO chief Jens Stoltenberg also condemned Putin's move, saying it violates international agreements signed by Moscow.
Ukrainian leader Volodymyr Zelensky spoke to US President Joe Biden before convening an urgent security council meeting aimed at forging a response to Russia's recognition.
Both Putin and Zelensky had spoken to French President Emmanuel Macron and German Chancellor Olaf Scholz in the previous hours.
The sudden and decisive move by Moscow overshadowed last-ditch diplomatic attempts to ease weeks of tensions over fears Russia has been planning an all-out invasion of its pro-Western neighbour.
European leaders have been urging Putin to hold a summit with Biden, and Russian Foreign Minister Sergei Lavrov told Putin he would meet his US counterpart on Thursday in Geneva.
Putin told his Security Council earlier Monday that there were "no prospects" for the 2015 Minsk peace accords aimed at resolving the Ukraine conflict.
'Very big threat' to Russia
And he made clear the stakes were bigger than Ukraine, whose efforts to join NATO and the European Union have deeply angered Moscow.
"The use of Ukraine as an instrument of confrontation with our country poses a serious, very big threat to us," Putin said.
The dramatic meeting -- with Putin sitting alone at a desk as his government, military and security chiefs took turns addressing him from a podium -- came after weeks of tensions between Moscow and the West over Ukraine.
Western leaders are warning that Russia is planning to invade its pro-Western neighbour after massing more than 150,000 troops on its borders, a claim Moscow has repeatedly denied.
Ukraine on Monday requested an urgent meeting of the UN Security Council to address the threat, citing security assurances it received in return for giving up its nuclear arsenal in 1994.
Announcing the request on Twitter, Foreign Minister Dmytro Kuleba cited article six of the Budapest memorandum, the landmark 1994 deal also signed by Russia, the United States and Britain.
The tensions have spiked in recent days after an outbreak of heavy shellfire on Ukraine's eastern frontline with the separatists and a series of reported incidents on the border with Russia.
Ukrainian officials said two soldiers and a civilian died in the shelling of frontline villages Monday.
In one of the most potentially dangerous, Moscow claimed -- to furious Kyiv denials -- that its forces had intercepted and killed five Ukrainian saboteurs who infiltrated Russian territory, and accused Ukraine of shelling a border post.
Ukrainian Defence Minister Oleksiy Reznikov said there was no sign of Russian forces withdrawing from the border and Moscow-backed rebels continued to shell Ukrainian positions.
In recent weeks, according to US intelligence, Moscow has massed an invasion force of troops, tanks, missile batteries and warships around Ukraine's borders in Belarus, Russia, Crimea and the Black Sea.
Biden has said that US intelligence believes that Putin has made a decision to invade Ukraine and that commanders are readying units to attack within days.
Western powers threatened a crippling sanctions package if Russia invades but it was unclear how far they would go if Russia stopped with the recognition of the separatists.