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UPDATE 1-Russian shares down, led by sanctions-hit Rosneft

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MOSCOW, July 17 (Reuters) - Moscow shares fell on Thursday after Washington imposed its toughest economic sanctions on Russia yet, sending shares in its largest oil producer Rosneft tumbling and hitting other energy, financial and defence firms.

The rouble-traded MICEX dropped 2.5 percent in early trading and was down 2.0 percent at 1,444.6 points at 0637 GMT; the dollar-traded RTS index was down 3.2 percent at 1,306.9 points.

Shares in Rosneft, hit by the sanctions which effectively close medium- and long-term dollar funding, paired losses to 4 percent after falling 6 percent within a minute of opening. The country's No.2 gas producer, Novatek, also under the new measures, fell 4 percent.

The U.S. government imposed sanctions on Wednesday on some of the key players in the Russian economy over what Washington says is Moscow's reluctance to curb violence in Ukraine, including Gazprombank and state Vnesheconombank, or VEB.

"The U.S. administration has unveiled new sanctions against Russian entities and individuals. However, despite the eye-catching headlines, the steps stop short of the much discussed, but yet not pursued, 'sectoral sanctions'," VTB Capital said in a note.

"That said, for the first time they touch - even if only lightly - major Russian corporations," it added.

Meanwhile the MSCI global emerging equities index was down 0.26 percent.

The rouble declined 1 percent against the dollar <RUBUTSTN=MCX RUB=>.

(Reporting by Polina Devitt, Olga Popova, Vladimir Soldatkin and Katya Golubkova; Editing by Elizabeth Piper)