By Matthew Dalton and Laurence Norman 

BRUSSELS--The European Union on Tuesday agreed to place sanctions on broad sectors of the Russian economy, EU diplomats said, marking a significant escalation of the bloc's response to allegations that Moscow is fueling the violent conflict in eastern Ukraine.

The measures will target four economic sectors; finance, militarily sensitive equipment, arms and oil production equipment. They will sharply restrict the ability of Russia's state-owned banks from raising financing on European markets. The measures will also place an embargo on the arms trade and restrictions on exports of militarily sensitive goods and technology used in unconventional oil drilling and exploration.

The sanctions should take effect by Thursday, diplomats said.

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Laurence Norman at laurence.norman@wsj.com