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UPDATE 2-Russia says Kiev will face justice for "bloody crime" in Ukraine

* Lavrov says U.S. "distorting" Geneva agreement

* Kerry warns of further sanctions against Russia

* Obama to call EU allies to discuss sanctions

* S&P cuts Russia's foreign currency ratings

* Seven injured by blast at checkpoint near Odessa

(Combines with Kerry comments, Odessa incident, S&P, adds Yatseniuk)

MOSCOW/KIEV, April 25 (Reuters) - Russia warned Kiev on Friday that it would face justice for a "bloody crime" in eastern Ukraine, where Ukrainian forces killed up to five pro-Russian rebels a day earlier, while Washington said Moscow was running out of time to defuse the crisis before facing further sanctions.

"They (Kiev) are waging a war on their own people. This is a bloody crime, and those who pushed the army to do that will pay, I am sure, and will face justice," Russia's foreign minister, Sergei Lavrov, told a meeting of diplomats.

He said Moscow was committed to implementing an agreement struck in Geneva on April 17 between Ukraine, Russia, the United States and the European Union to ease tensions in Ukraine and disarm illegal groups but accused Washington of distorting it with "one-sided demands".

U.S. President Barack Obama, who accuses Moscow of sending agents to coordinate the unrest in the east, as it did before seizing Ukraine's Crimea region in February, is planning to call allies in Europe later in the day to nudge them towards tougher sanctions.

"The window to change course is closing," U.S. Secretary of State John Kerry said late on Thursday, citing Obama's earlier comments that Washington was ready to impose new sanctions, on top of those imposed after Crimea was annexed.

Kerry said Russia was using propaganda to hide what it was trying to do in eastern Ukraine - destabilise the region and undermine next month's Ukrainian presidential elections - and denounced its "threatening movement" of troops up to Ukraine's border.

"If Russia continues in this direction, it will not just be a grave mistake, it will be an expensive mistake," Kerry said.

Russian President Vladimir Putin has scoffed at the sanctions so far imposed, which have been limited to travel bans and overseas assets freezes on individuals.

Ukraine said Russian troops conducting exercises had approached to within 1 kilometre (1,100 yards) of the border and that aircraft had also taken part in the manoeuvres.

Prime Minister Arseny Yatseniuk said Russia wanted to start World War Three by occupying Ukraine "militarily and politically" and creating a conflict that would spread to the rest of Europe.

His interior minister, Arsen Avakov, said the operation against rebels in the east was continuing and Ukraine had the resources to operate around the clock, dismissing talk that its forces were stretched or that the government had called a pause after closing in on the rebel city of Slaviansk.

He insisted every care was being taken to avoid non-combatant casualties, after Moscow warned it may act if Kiev used the army against civilians.

German foreign minister Frank-Walter Steinmeier meanwhile suggested that the United States, the EU and Russia should make a joint high-level trip to hotspots in Ukraine with local officials to signal political backing for the Geneva agreement, under which they all committed to seeking to disarm illegal groups, including rebels occupying about a dozen public buildings in the largely Russian-speaking east.

ODESSA CLASH

Seven people were injured overnight at a pro-Ukrainian checkpoint near the Black Sea port of Odessa when an explosive device blew up, police said on Friday.

Residents in the town have built several such checkpoints near the town aimed at stopping pro-Russian separatists entering from Moldova's breakaway territory of Transdniestria.

Interfax news agency quoted witnesses as saying a bomb was thrown at the checkpoint from a passing car, though this was not confirmed by police.

Transdniestria, home to Russian peacekeepers and Russian troops guarding a Soviet-era arms stock, declared independence in the early 1990s.

NATO warned last month of a possible Russian military grab for Transdniestria following its annexation of Crimea.

Ukrainian forces killed up to five pro-Moscow rebels on Thursday as they closed in on the separatists' military stronghold in the east, and Russia launched army exercises near the border in response, raising fears its troops would invade.

The Ukrainian offensive amounts to the first time Kiev's troops have used lethal force to recapture territory from rebels who have seized swathes of eastern Ukraine since April 6 and proclaimed an independent "People's Republic of Donetsk".

The Kremlin, which says it has the right to invade its neighbour to protect Russian speakers, has built up forces - estimated by NATO at up to 40,000 troops - on Ukraine's border.

ECONOMIC DAMAGE

Though the direct financial impact of sanctions has been limited, Russia's economy is being damaged by the crisis.

Central bank data released earlier this month showed an estimated $63.7 billion in net capital outflows in the first three months of 2014, the same as for the whole of 2013. The World Bank has said this year's total could reach $150 billion.

Credit agency Standard & Poor's cut Russia's foreign currency sovereign ratings on Friday, a decision that pushed Russia's already battered shares and currency down further.

"The downgrade reflects the risk we perceive of a continuation of the large financial outflows observed in the first quarter of 2014, during which the size of Russia's financial account deficit was almost twice that of the current account surplus," the agency said.

Ukraine, a former Soviet republic, slid into unrest late last year when Moscow-backed President Viktor Yanukovich rejected a pact to build closer ties with Europe. Protesters took over central Kiev and he fled in February. Days later, Russian troops seized control of Crimea.

(Additional reporting by Alexei Anishchuk, Lidia Kelly and Oksana Kobzeva in Moscow, Alastair MacDonald and Pavel Polityuk in Kiev, Arshad Mohammed in Washington, and Erik Kirschbaum in Berlin; writing by Will Waterman; editing by Giles Elgood)