The group of leading industrialised nations said Russia had undermined "Ukraine's sovereignty, territorial integrity and independence."
The warning came after the EU added eight more Russians to its sanctions, BBC reports.
Earlier, Russia described new US and EU sanctions as "destructive and short-sighted", and said they would lead to higher energy prices in Europe.
The G7 group of economic powers includes the United States, Japan, Germany, Britain, France, Italy and Canada.
Its leaders said Russia could still "choose the path of de-escalation", but warned President Vladimir Putin that he would face greater economic costs if he continued to back Ukrainian separatists.
They also called on all sides to establish a ceasefire at the crash site of the Malaysian Airlines jet that was shot down on 17 July in eastern Ukraine.