Russian President Dmitry Medvedev announced on Tuesday that Moscow had decided to recognise two rebel regions of Georgia as independent states, setting it on a collision course with the West.

"I have signed decrees on the recognition by the Russian Federation of the independence of South Ossetia and the independence of Abkhazia," Medvedev said in a televised statement from his summer residence in Sochi, just along the Black Sea coast from Abkhazia.

The West had strongly urged Moscow not to recognise the two regions and to back Georgia's territorial integrity. Britain "categorically rejected" the move, Germany called it unacceptable and France expressed dismay.

"That the Russian government leadership now has chosen this route means they have chosen a policy of confrontation, not only with the rest of Europe, but also with the international community in general," said Swedish Foreign Minister Carl Bildt.

Flanked by a Russian flag and a presidential banner, a sombre-looking Medvedev said Tbilisi's attempt to seize back the two regions by force earlier this month had killed all hopes for their peaceful co-existence in one state with Georgia.

"(Georgian President Mikheil) Saakashvili chose genocide to solve his political tasks," Medvedev declared.

"...The peoples of South Ossetia and Abkhazia have more than once spoken in referenda supporting the independence of their republics. We understand that after what had happened...they have the right to decide their fate themselves."

Jubilant residents in the Abkhaz capital Sukhumi fired shots into the air, uncorked champagne bottles and wept after the news from Moscow. Similar celebrations were seen in the South Ossetian capital Tskhinvali.

"We feel happy. We all have tears in our eyes. We feel pride for our people," said Aida Gabaz, a 38-year-old lawyer.

Georgia and Russia fought a brief war over the breakaway region of South Ossetia earlier this month after Georgia sent in troops to try to retake the province by force. Russia responded with a massive counter-attack by land, sea and air.

Georgia's Deputy Foreign Minister Giga Bokeria described Moscow's recognition of South Ossetia and Abkhazia as an "unconcealed annexation" of Georgian territory.

Russian stocks fell on Medvedev's announcement to their lowest levels in nearly two years and the cost of insuring Russian debt increased as traders worried about rising tension.

"The recognition of these two entities is clearly a step in the wrong direction from the stock markets' point of view," said David Aserkoff, an equity strategist at Renaissance Capital.

France, which had brokered a ceasefire to end the fighting between Russia and Georgia, was dismayed at the Kremlin's move.

"We consider this is a regrettable decision and I recall our attachment to the territorial integrity of Georgia," a French Foreign Ministry spokesman said.

Britain took a tougher line. A Foreign Office spokeswoman said "we reject this categorically and reaffirm Georgia's sovereignty and territorial integrity".

Before Medvedev's announcement, Russia's envoy to Nato, Dmitry Rogozin, compared the position to the eve of World War One, saying a new freeze in relations was inevitable.

"The current atmosphere reminds me of the situation in Europe in 1914 ... when, because of one terrorist, leading world powers clashed," Rogozin told the RBK Daily business newspaper.

"I hope (Georgian President) Mikheil Saakashvili will not go down in history as a new Gavrilo Princip," Rogozin said, referring to the man who in August 1914 killed Austro-Hungarian Archduke Franz Ferdinand, triggering the world war.

He announced at a press conference later that Russia planned to halt visits by senior Nato officials and joint military exercises with the alliance. - Reuters