UPDATE 1-Obama says Putin on doomed drive to recreate Soviet glories
* G7 expresses concerns about upsurge in Ukraine violence
* Obama says Putin's policies crushing Russian economy, people
* Sanctions could be strengthened if separatists make gains (Recasts with new quotes from Obama, Merkel, G7 sources)
By Noah Barkin and Jeff Mason
KRUEN, Germany, June 8 (Reuters) - U.S. President Barack Obama accused President Vladimir Putin of wrecking Russia's economy in a doomed drive to recreate the glories of the Soviet empire and G7 leaders said they could step up sanctions against Moscow if violence in Ukraine escalated.
At the conclusion of a Group of Seven summit in the Bavarian Alps, leaders expressed concern about an upsurge in fighting in eastern Ukraine, where Russian-backed separatists have clashed with Kiev's troops in violation of a ceasefire agreed in April.
The strongest rhetoric came from Obama, who told a news conference the Russian people were suffering severely because of Putin's policies.
It was the second summit of the group of leading industrial nations to exclude Russia since Putin was frozen out of what used to be the G8 after Moscow's annexation of Crimea last year, a move the G7 condemned in their communique as "illegal".
"He's got to make a decision," Obama said of Putin. "Does he continue to wreck his country's economy and continue Russia's isolation in pursuit of a wrong-headed desire to recreate the glories of the Soviet empire, or does he recognise that Russia's greatness does not depend on violating the territorial integrity and sovereignty of other countries." Continued...