By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- Major red flags of the possible fallout from tougher sanctions on Russia came on Tuesday, when U.K. oil producer BP PLC warned that further economic restrictions would hurt its business. European stock markets, however, advanced against a background of solid earnings reports.

Sanction details: The U.S. and Europe agreed on Monday to adopt what would yet be the toughest restrictions on Kremlin to force Moscow to cut support for the pro-Russia separatists and European Union ambassadors from the 28 member states are meeting on Tuesday to finalize the details.

The EU -- Russia's largest trading partner -- is expected to agree on "phase three" sanctions for the first time, which could include limiting financial transactions with Russia's state banks as well as targeting entire sectors rather than individuals. The U.S. is likely to follow suit and announce similar sanctions.

Market reactions: Shares of BP (BP) dropped 1.4% after the U.K. oil major warned that additional measures imposed on Russia and Rosneft would have a material impact on its business. Read: BP among losers in Europe on Russia sanctions woes

Most other European stocks, however, were rising with some solid earnings reports overshadowing the sanction fears. The Stoxx Europe 600 index added 0.4% to 342.64, on track for the first close in positive territory in three days.

Germany's DAX 30 index climbed 0.5% to 9,648.13, while France's CAC 40 index gained 0.6% to 4,370.64. The U.K.'s FTSE 100 index rose 0.5% to 6,820.31.

Comments: Analysts appeared to be concerned with three things on Tuesday: Russian sanctions, earnings reports and the upcoming deluge of U.S. events and data.

In relation to Russia, Naeem Aslam, chief market analyst at AvaTrade, said the question really is "how far we are willing to stand the pain which will emerge due to these sanctions."

"Similarly, if Russia is going to pay any attention to these sanctions and acknowledge that enough is enough and they are throwing the towel," he said in a note.

The U.S. Federal Open Market Committee begins its two-day policy setting meeting today, with the decision due Wednesday at 2 p.m. Eastern Time. Economists at Deutsche Bank said in a note that the Fed is unlikely to say anything it thinks will move the markets this week.

"Neither the overall economic activity picture nor the inflation data have been firm enough recently to move the Committee to signal that they are moving closer to lift-off," they said.

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