The Prime Minister will urge fellow European leaders to ratchet up the pressure when they meet for a summit in Brussels today.
The gathering comes after Nato released images showing the extent of Russian forces on the ground in the east of the country.
UK Government sources said they believed the separatists now had an array of heavy weaponry supplied by President Vladimir Putin, including 100 battle tanks, 100 artillery pieces, anti-tank weapons and missile launchers.
US President Barack Obama said the satellite pictures made it "plain for the world to see" that Moscow had "deliberately and repeatedly violated the sovereignty and territorial integrity of Ukraine".
"The violence is encouraged by Russia. The separatists are trained by Russia, they are armed by Russia, they are funded by Russia," he said. The Russian tanks filmed rumbling through Ukraine were "a continuation of what's been taking place for months now", he added.
Nato Secretary-General Anders Fogh Rasmussen insisted that the alliance would "fully respect" any membership bid by Kiev.
Ukrainian Prime Minister Arseny Yatseniuk has said he will ask parliament to abandon the country's non-aligned status and seek to join - a move that Russia has previously dismissed as unacceptable.
Mr Rasmussen said: "Despite Moscow's hollow denials, it is now clear that Russian troops and equipment have illegally crossed the border into eastern and south-eastern Ukraine. Russian forces are engaged in direct military operations inside Ukraine."
Meanwhile, Mr Putin issued a statement calling on pro-Russian separatists to avoid "senseless deaths" by releasing Ukrainian soldiers who have been surrounded. He is thought to have been referring to fighting outside the strategic town of Ilovaysk, east of Donetsk.
"I'm calling on insurgents to open a humanitarian corridor for Ukrainian troops who were surrounded in order to avoid senseless deaths," Mr Putin said. He did not address the claims about military presence. The crisis is to be discussed by EU leaders in Brussels tonight. Mr Cameron is expected to urge counterparts to demonstrate political will to ratchet up the sanctions regime.
He will call for closer alignment between EU sanctions and those imposed by the US and Canada - raising the prospect of measures against specific firms in sectors such as banking and energy.
Several EU foreign ministers accused Russia of invading eastern Ukraine. "We have to be aware of what we are facing: We are now in the midst of the second Russian invasion of Ukraine within a year," said Swedish foreign minister Carl Bildt, referring to Russia's annexation of Ukraine's Crimean Peninsula in April. "We see regular Russian army units operating offensively on the Ukrainian territory against the Ukrainian army. We must call a spade a spade."
All options except military action will be considered to punish Russia for pursuing "the wrong path," said Luxembourg's foreign minister Jean Asselborn.
"The EU should be ready to move forward with possible new measures against Russia because the situation is still getting worse," said Estonian foreign minister Urmas Paet.