President Dmitry Medvedev has declared that Russia formally recognises the independence of the breakaway Georgian regions of South Ossetia and Abkhazia.
Mr Medvedev said Russia had tried to preserve Georgian unity for 17 years, but that the situation had changed after violence earlier in August.
He said Moscow now felt obliged to recognise South Ossetia and Abkhazia as other countries had done with Kosovo.
Georgia said Russia was seeking to "change Europe's borders by force".
In a televised address on Monday, President Mikhail Saakashvili said the declaration was illegal and vowed to begin a "peaceful struggle" to restore Georgia's territorial integrity.
Earlier, the United States and France called the Russian move regrettable, while Britain said it categorically rejected it. Nato said the declaration violated numerous United Nations Security Council resolutions that Russia itself had endorsed.
However the leaders of Abkhazia and South Ossetia, which have had de facto independence since the early 1990s, thanked Russia.
Fighting between Russia and Georgia began on 7 August after the Georgian military tried to retake South Ossetia by force. Russian forces subsequently launched a counter-attack and the conflict ended with the ejection of Georgian troops from both South Ossetia and Abkhazia and an European Union-brokered ceasefire.
President Medvedev said he had signed a decree to recognise Abkhazia and South Ossetia as independent states. He instructed the Russian foreign ministry to open negotiations on formal diplomatic relations with the two regions and called on other states to follow his country's example.
No easy choice - Medvedev
Mr Medvedev said he had "taken into account the expression of free will by the Ossetian and Abkhaz peoples" and accused Georgia of failing over many years to negotiate a peaceful settlement to the problem.
"That was no easy choice to make, but it is the sole chance of saving people's lives."
The move followed votes in both houses of parliament on Monday, which called on Moscow to recognise the regions' independence.
In an interview with the BBC, Mr Medvedev later said Russia had been obliged to act following a "genocide" started by his Georgian counterpart against separatists in South Ossetia.
He compared Russia's recognition of Abkhazia and South Ossetia to the West's recognition of Kosovo, which unilaterally declared independence from Serbia in February 2008. He also denied that Russia had breached the ceasefire agreement with Georgia, saying pursuing the security of the two regions included addressing their status.
Mr Medvedev said relations with the West were deteriorating sharply and that a new Cold War could not be excluded, but that Russia did not want one.
Later, Georgia's President Saakashvili accused Russia of trying to "break the Georgian state, undermine the fundamental values of Georgia and to wipe Georgia from the map".
"Today's step by Russia is completely illegal and will have no legal basis, neither for Georgia nor for the rest of the world," he said.
"Russia has made an extraordinary strategic mistake and has badly damaged its place in modern international relations."
Mr Saakashvili described the declaration as "the first attempt in Europe after Nazi Germany and the Stalinist Soviet Union to Â change the borders of Europe by force".
Western countries, including the US, Germany, the Britain and France also condemned Russia's move.