* Russia failed to cooperate with investigation - Dutch PM Rutte
* Netherlands demands Moscow work with inquiry by prosecutors
* Investigation points finger at Russian state
* Russia says investigation didn't prove Russian involvement (Recasts to add Dutch PM Rutte remarks, Russian reaction)
By Bart H. Meijer and Toby Sterling
THE HAGUE, May 25 (Reuters) - The Netherlands told Moscow on Friday it will hold the Russian state legally responsible for the downing of Malaysia Airlines Flight 17 in July 2014, after investigators concluded that a Russian army missile system was used in the attack.
MH17 was shot down over territory held by pro-Russian separatist forces in eastern Ukraine as it flew from Amsterdam en route to Kuala Lumpur, killing all 298 people onboard, roughly two-thirds of them Dutch.
A team of international investigators said on Thursday that the "Buk" missile system used to bring down the passenger plane came from the 53rd Anti-Aircraft Brigade, based in the western Russian city of Kursk. is the first time the finger points to one specific country," Prime Minister Mark Rutte told reporters after an emergency cabinet meeting. "We are holding Russia responsible for their role in the deployment of the Buk rocket system."
The diplomatic escalation comes at a time when relations between Western powers and Russia have reached their lowest point in decades.
"Russia didn't cooperate with the international legal requests in relation to the investigation," Rutte said, referring to the probe carried out by prosecutors from Australia, Malaysia, Belgium, Ukraine and the Netherlands.
The Netherlands and Australia informed Moscow that it expects Russia to now provide full assistance to the investigation, which is in the final stage of identifying perpetrators to be tried under Dutch law.
U.S. State Department spokeswoman Heather Nauert said Washington supported the decisions by the Netherlands and Australia "to hold Russia to account."
"It is time for Russia to acknowledge its role in the shooting down of MH-17 and to cease its callous disinformation campaign," she said.
Russia has always denied any involvement, and said on Thursday none of its missile launchers had ever entered Ukraine, despite photographic evidence presented by prosecutors. Foreign Minister Sergei Lavrov said on Friday his Dutch counterpart had been unable to provide evidence of Russia's involvement in the crash, the Russian TASS news agency reported.
Rutte declined to specify what steps would follow if Moscow continued to fail to cooperate. The speaker of Russia's lower house of parliament, Vyacheslav Volodin, was quoted by the TASS Russian news agency as saying on Friday that Russia was prepared for everything, including new sanctions.
Dutch Foreign Minister Stef Blok said the Netherlands and Australia would seek unspecified financial damages.
Blok said that attempts to hold Russia responsible for the plane's downing under international law would be a different, parallel process from the ongoing investigation by prosecutors seeking to establish individual criminal responsibility.
Russia is already under U.S. and European sanctions over its 2014 annexation of Ukraine's Crimea peninsula and support for separatists in eastern Ukraine. More recently, dozens of countries have expelled Russian diplomats in solidarity with Britain which accused Moscow of using a nerve agent to poison an ex-spy and his daughter in an English city in March.
The United States has tightened sanctions this year after accusing Russia of meddling in the 2016 U.S. presidential election. Russia denies all of the Western accusations against it and says it is the target of a propaganda campaign.