European Council President Herman Van Rompuy said any further steps by Russia to destabilise Ukraine would have "far-reaching consequences".
It comes hours after President Barack Obama announced further US sanctions against Russia over the Crimea crisis.
Crimea is in the process of being absorbed into Russia following a disputed referendum in the peninsula.
The referendum has been described as illegal by Kiev and the West.
A treaty joining Crimea to Russia has now been approved by Russia's lower house of parliament - the Duma - and is expected to be ratified by the upper house on Friday.
Also on Friday, the EU is due to sign the political section of a trade pact with Ukraine - the same agreement that Ukraine's ousted President Viktor Yanukovych declined to sign in November, sparking the current crisis.
Broader sanctions threat
Earlier this week, the EU announced asset freezes and travel bans against 21 individuals in Russia and Ukraine.
At the same time the US ordered similar sanctions against 11 individuals.
Following a summit of EU leaders in Brussels on Thursday evening, Mr Van Rompuy described Russia's annexation of Crimea as "a clear violation of Ukrainian sovereignty and of international law".
"We strongly condemn the unconstitutional referendum in Crimea. We will not recognise the annexation, nor will we recognise it in the future," he said.
"There is no place for the use of force and coercion to change borders on the European continent in the 21st Century."
Mr Van Rompuy said that the 28-nation bloc was also cancelling an EU-Russia summit in June and member states would cancel regular bilateral summits.
"We make clear that failure to settle the crisis peacefully, and any steps by Russia to destabilise Ukraine, will have far-reaching consequences - and by that we mean consequences on relations in a broad range of economic areas," he added.
German Chancellor Angela Merkel said the European Commission - the EU's executive - had been asked to prepare broader economic sanctions against Russia if the crisis escalated.
"We asked the commission today to look at... very broad-based possible economic sanctions, and to prepare the ground for these sanctions," she said.
Leaving the summit, British Prime Minister David Cameron said the EU was sending a "clear, strong and consistent message".
"It has been hard work but we've made some real progress," he said.
The names of the latest individuals to be targeted by the EU sanctions will be made public on Friday.
Correspondents say the dispute over Crimea is expected to dominate President Obama's visit to Europe next week.
He will chair a meeting of the G7 group of seven leading economies - pointedly leaving out Russia which would normally make it the G8.
Washington's latest measures target a further 20 people closely associated with Russian President Vladimir Putin, as well as a bank, Rossiya, controlled by his allies.
In response, Russia said it was imposing its own sanctions against US officials and politicians.
Meanwhile, Moscow has been tightening its grip on Crimea.
On Thursday, Russian-allied troops took over at least two Ukrainian navy ships at anchor in the port of Sevastopol.
A Ukrainian defence ministry spokesman said at least 15 men were involved in the assault.
Russian forces effectively took over Crimea - with its predominantly ethnic Russian population - after President Yanukovych fled Kiev on 22 February following protests in which more than 80 people were killed.
Source: BBC News