FRANKFURT/VIENNA (Reuters) -A Russian court froze the shares in Raiffeisen Bank International's local arm, the biggest Western bank in Russia said on Thursday, blocking the sale of the unit and escalating a standoff between Moscow and the West.

Austria-based RBI had vowed to spin off its Russian business, which provides a payment lifeline to hundreds of companies there, after coming under pressure from international regulators. But more than two years into the war between Russia and Ukraine, little has changed.

The news sent the bank's stock down by more than 7% on Friday.

A spokesperson for Raiffeisen said that the Russian court move ruled out a sale of the bank, although they said it would have no impact on the Russian bank's operations or on the efforts demanded by the European Central Bank to reduce it.

"We can still appoint management and give instructions to the Russians but we cannot sell the bank," the spokesperson said.

RBI will attempt to reverse the court decision, it said in the statement, which is the biggest such freeze involving a Western bank in Russia.

Although Italy's UniCredit has a business in Russia too and is also under pressure to leave, RBI is far larger and has become a test of Western resolve to end ties with Russia.

Russian authorities had made it clear to RBI, which has around 2,600 corporate customers, 4 million local account holders and 10,000 staff, that they wish it to stay because it enables international payments, one source has told Reuters.

RBI is a critical financial lifeline for millions of Russian customers who want to send euros or dollars abroad. Western regulators want this to change. The European Central Bank is demanding the bank pare back its Russia business.

With sprawling industrial holdings, more than 18 million customers from Vienna to Moscow and 44,000 staff, Raiffeisen is a financial linchpin for Austria and much of eastern Europe.

Russia has become an even bigger money spinner for the bank since the Ukraine war started in 2022. Russia accounted for about half of the group's profits in the first three months of this year as fees on payments abroad spiked.

SANCTIONS AND SUSPENSIONS

The freeze is related to a recent claim by Russian investment holding company Rasperia against Strabag and its Austrian shareholders and the Raiffeisen unit, though the lender is not accused of any wrongdoing, the bank said.

RBI had sought to buy a stake in Vienna-based construction group Strabag from a company Strabag identified as being controlled by Oleg Deripaska, who has denied existing links to Strabag and has dismissed Western sanctions against him as misguided and based on false information.

The U.S. Treasury in May said a Russian company, Iliadis, was set up to acquire Rasperia, which held Deripaska's frozen shares.

The U.S. Treasury's sanctions enforcer, the Office of Foreign Assets Control, had opened an investigation into Raiffeisen's Russian activities in early 2023.

Pressure from Washington prompted Raiffeisen this year to abandon the plan to buy the stake in Strabag, a deal that was aimed at unlocking bank funds now frozen in Russia.

(Reporting by Emma-Victoria Farr, John O'Donnell and Alexandra Schwarz-Goerlich; Editing by Lisa Shumaker, Elisa Martinuzzi and Emelia Sithole-Matarise)