* Crises in Ukraine, Iraq dominate NATO summit
* Rasmussen sets toughest tone on Russia since Cold War ended
* NATO says Moscow has thousands of combat troops in Ukraine
* Western leaders meet Poroshenko in show of support (Adds White House, Hollande on sanctions)
By Adrian Croft and Kylie MacLellan
NEWPORT, Wales, Sept 4 (Reuters) - NATO demanded on Thursday that Moscow withdraw its troops from Ukraine as U.S. President Barack Obama and his Western allies held a summit intended to buttress defences against Russia in the biggest strategic shift since the Cold War.
While Western leaders discussed tougher sanctions against Russia over continued fighting in eastern Ukraine, the Kremlin dangled the prospect of an imminent ceasefire in the five-month-old armed revolt by pro-Russian separatists.
"We call on Russia to end its illegal and self-declared annexation of Crimea," Secretary-General Anders Fogh Rasmussen declared as the 28 NATO leaders met Ukrainian President Petro Poroshenko at a golf resort near the Welsh city of Newport.
"We call on Russia to pull back its troops from Ukraine and stop the flow of arms, fighters and funds to the separatists," Rasmussen said. "We call on Russia to step back from confrontation and take the path of peace."
His statement set the tone for a two-day meeting marked by the most serious east-west standoff since the fall of the Berlin Wall 25 years ago and the collapse of the Soviet bloc, as well as alarm at territorial gains by Islamist insurgents in Iraq and Syria.
Poroshenko, whose forces have suffered a string of setbacks in the last week, told reporters he would order a ceasefire on Friday if an agreement on a peace plan to end the war in eastern Ukraine is signed at talks in Minsk.
"The only thing we need now for peace and stability is just two main things: first, that Russia withdraw their troops, and second, to close the border," he said.
A NATO military officer said Moscow had "several thousand" combat troops and hundreds of tanks and armoured vehicles operating in Ukraine. The Kremlin denies it has any forces fighting alongside the rebels.
The White House said Obama and the leaders of Germany, France, Britain and Italy agreed on the sidelines of the summit that Russia should face "increased costs" for its actions. French President Francois Hollande said tougher European Union sanctions, due to be adopted on Friday, would depend on events in the coming hours.
The NATO leaders also discussed how to tackle Islamic State militants who have captured swathes of Iraq and Syria, in a new threat on the alliance's southeastern flank, and how to stabilise Afghanistan when NATO forces leave at the end of the year.
Poroshenko's forces were battling to cling to the key port of Mariupol on the Sea of Azov, which is vital to Ukrainian steel exports. Explosions were heard close to the city, halfway between Crimea and Russia.
The Ukrainian leader sought arms, training for his armed forces from his Western partners as well as political support against Russian President Vladimir Putin.
Poroshenko's talk of reviving Ukraine's bid to join the U.S.-led military alliance has reopened a rift within NATO.
Obama said in Estonia on Wednesday that the door to membership would remain open to states that meet NATO standards and "can make meaningful contributions to allied security", but France and Germany remain opposed to admitting Kiev, fearing it would exacerbate tension with Moscow and could suck them into a war.
Russian Foreign Minister Sergei Lavrov underlined Moscow's opposition to Ukraine joining NATO, warning that attempts to end the country's non-aligned status could harm security. He accused the United States of supporting "the party of war" in Kiev.
After a week of defiant statements from Putin, Lavrov said Russia was ready for practical steps to de-escalate the crisis and urged Kiev and the rebels to heed ceasefire proposals put forward by Moscow on Wednesday.
Rasmussen said NATO welcomed efforts for a peaceful solution but "what counts is what is actually happening on the ground, and we are still witnessing, unfortunately, Russian involvement in destabilising the situation in eastern Ukraine".
As more than a decade of NATO-led combat operations in Afghanistan draws to a close, marked by a solemn ceremony at the summit on Thursday, the alliance is refocusing in part on its core task of defending its territory.
NATO leaders will announce on Friday the creation of a "spearhead" rapid reaction force, potentially including several thousand troops, that could be sent to a hotspot in as little as two days, officials say.
Eastern European NATO members, including Poland, have appealed for NATO to permanently station thousands of troops on their territory to deter any possible Russian attack.
But NATO members have spurned that idea, partly because of the expense and partly because they do not want to break a 1997 agreement with Russia under which NATO committed not to permanently station significant combat forces in the east.
Instead, leaders will agree to pre-position equipment, fuel and ammunition in eastern European countries with bases ready to receive the NATO rapid reaction force if needed.
The Baltic states Latvia, Lithuania and Estonia, the only parts of the former Soviet Union to be admitted to NATO, fear Moscow could meddle in their affairs with the same rationale it applied in Ukraine - protecting Russians.
So far, Western military gestures of support for Ukraine have been mostly symbolic. NATO leaders will approve a package of support for Kiev, setting up trust funds worth around 12 million euros ($15.8 million) to improve Ukrainian military capabilities in areas such as logistics, command and control and cyber defence.
A dozen countries will join an exercise in Lviv, Ukraine, later this month, co-hosted by Ukraine and the U.S. Army.
NATO officials say the alliance itself will not send the weapons that Ukraine is looking for but individual allies could do so if they wish.
After the Cold War, NATO and Russia sought cooperation in some security fields but NATO has concluded that this effort has failed, and for now at least, Russia is not a partner, a senior alliance official said. Cooperation was suspended in March after the annexation of Crimea.
"Russia has basically violated very fundamental agreements on the basis of which we have constructed peace and security in Europe for the last two decades," said the official, speaking on condition of anonymity.
France, which has faced fierce pressure from Washington and other NATO allies to halt the sale of two helicopter carriers to Russia, said on Wednesday it would not for now deliver the first of the warships due to Moscow's actions in Ukraine. Hollande said the deal was not cancelled or suspended, but a ceasefire and a political settlement were necessary for delivery.
What NATO leaders will agree to do to help Iraq combat Islamic State militants is less clear. Rasmussen said the allies would consider seriously any request from Iraq for assistance in dealing with the growing insurgency by Sunni fighters.
The alliance as a whole is highly unlikely to follow the U.S. lead in staging military strikes on Islamic State, NATO diplomats say, though individual allies such as France and Britain might do so. NATO could revive a mission to help train the Iraqi armed forces that it halted in 2011, diplomats say. (Additional reporting by Guy Faulconbridge and Julien Ponthus in Newport, Stephen Addison in London, Gareth Jones in Kiev and Katya Golubkova in Moscow; Writing by Paul Taylor; Editing by Peter Graff, Anna Willard and Will Waterman)