Russia's intervention means "the threat of a division of Europe is real again," Steinmeier said as he arrived for an emergency meeting of EU foreign ministers.
"But now is time for diplomacy. Diplomacy does not mean weakness but is more needed than ever to prevent us from being drawn into the abyss of military escalation," he said.
Steinmeier spoke as reports sourced to Ukraine border guards said Russian troops were moving into Crimea and as Moscow Foreign Minister Sergei Lavrov accused Kiev of attacking Russian minority rights.
The German minister said "the situation in Ukraine worsens every day and so far, an end to the escalation is not seen".
But that does not mean the die is cast, he said.
"A reversal is still possible and therefore today is the day for clear messages to Russia."
Russian "military activities are completely unacceptable from our point of view," Steinmeier added.
'No military option'
Chancellor Angela Merkel's spokesman Steffen Seibert said on Monday that it was not too late for a peaceful solution.
Berlin and its partners support a solution "away from the logic of troop movements and the logic of soldier deployments and back to dialogue", said Seibert.
He said he saw "no military option" and that the German government "is not thinking in military terms" about the crisis.
After Merkel spoke with various leaders over the weekend, Seibert said Berlin would do everything it could to help end the Ukraine crisis.
"It is not yet too late to solve this crisis politically and peacefully," he told reporters.
Ministers going into Monday's talks said they had to make sure Russia understood the consequences of its actions and that everything was on the table, including sanctions.
"I don't want to rule anything in or rule anything out," said British Minister for Europe David Lidington.
If Russia persists in its course of action and refuses to engage in direct dialogue, then "that must come with a cost," Lidington said.
Stock markets reacted badly on Monday to the crisis. The German blue-chip DAX slumped by more than three percent in the morning.
Late on Sunday Germany said Putin had accepted an offer from Merkel to set up a "contact group" with Ukraine over the crisis, but Moscow did not confirm the German reports.
"President Putin accepted the German chancellor's proposal to immediately establish a mission of enquiry as well as a contact group, possibly under the direction of the OSCE, to open a political dialogue," a statement from the German government said.
Western allies have condemned Russia's threat to invade its Western-leaning neighbour, which analysts say risks sparking the worst crisis since the Cold War.
Merkel told Putin the intervention was a violation of a 1994 Budapest memorandum on security assurances in which Russia committed itself to respecting the independence and sovereignty of Ukraine in its existing borders, as well as the 1997 treaty on the Russian Black Sea fleet, based in Crimea.
The memorandum was signed by Britain, Ukraine, Russia and the United States. The statement said Merkel called on Putin to respect Ukraine's territorial integrity.
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