Russia suspended all transport and postal links with neighbouring Georgia on Tuesday despite attempts by Georgia on Monday to defuse a growing crisis between the two former Soviet states.

Russia imposed the sanctions in retaliation for the arrest last week of four Russian army officers accused of spying. Georgia released the officers on Monday to ease tensions.

The four officers arrived in Moscow late Monday and were greeted by Russian Defence Minister Igor Ivanov.

Russian President Vladmir Putin said the punitive measures are Russia's response to the "actions of a bandit state" and they will remain in effect until further notice.

The severing of transport links left passengers in train and airport terminals stranded, unable to travel in either direction.

Russia may also ban all money transfers between the two countries. Debates have been scheduled this week by Russian legislators on a new bill that could bar Georgians living in Russia from cabling money home

Economistssayabout 20 per cent of Georgia's gross domestic product comes from money sent to relatives back home by Georgians working in Russia. A money transfer ban would have a serious impact on Georgia's fragile economy.

Putin has made no secret of his intense anger at the policies of Georgian President Mikhail Saakashvili, a young and popular politician educated in the U.S. Saakashvili has said he would like his country to join NATO.

The measures aredesigned to have a severe economic impact.

"As of Oct. 3, all air, rail, road and sea transport to Georgia has been halted until further notice," Timur Khikhmanov, a spokesman for Russia's Transport Ministry, told the Associated Press.

The Communications Ministry also said postal services to Georgia had been suspended.

The sanctions come in the wake of a government session on Monday, when Putin denounced the arrests as "state terrorism involving hostage-taking" and ordered his top cabinet members to draft retaliatory measures.

The European Union said Russia's sanctions against Georgia are out of proportion and urged the two countries to try to settle their differences.

About 300,000 Georgianslive in Russia, according to Russian officials, but some estimates put their number at aboutone million of Georgia's 4.4 million population.

Saakashvili was elected in 2003 with significant popular support. Georgia is dependent on Russia for trade, energy and power.