The action followed Crimea's vote Sunday to secede from Ukraine and the Crimea Parliament's request Monday to become part of the Russian Federation.
RIA Novosti reported Putin signed the decree in advance of his scheduled address to the Russian Parliament Tuesday.
The decree recognizes Sevastopol as a "special autonomous" region within the Crimea. Sevastopol is where the Russian Black Sea fleet is based.
EU foreign ministers reacted to Sunday's vote by imposing sanctions against 21 Russian and Ukrainian officials, who would face asset freezes and travel bans, the British newspaper the Guardian reported. U.S. President Barack Obama followed suit, issuing a new executive order expanding an earlier sanctions action.
In Simferopol, the capital of Crimea, the Parliament Monday approved the referendum to break away from Ukraine, declared independence and formally applied to become part of Russia, Voice of America reported.
The vote culminates weeks of escalating tensions in the pro-Russia region, which saw thousands of troops mass and surround Ukraine military installations soon after Viktor Yanukovych, a Russian ally, was ousted and an interim government installed in Kiev following months of anti-government protests. Crimea and Russia challenged the fledgling government in Kiev.
Obama spoke Sunday with Putin about the referendum, stressing it violated the Ukrainian constitution, took place under the threat of Russian military intervention, and would never be recognized by the United States or the international community, the White House said in a readout of the conversation.
He also said Russia's actions violated Ukraine's sovereignty and territorial integrity and that, in coordination with our European partners, the United States was prepared to sanction Russia for its actions.
Obama "reiterated that a diplomatic resolution cannot be achieved while Russian military forces continue their incursions into Ukrainian territory and that the large-scale Russian military exercises on Ukraine's borders only exacerbate the tension," the statement said.
Obama's latest executive order authorizes "the secretary of the treasury, in consultation with the secretary of state, to impose sanctions on named officials of the Russian government, any individual or entity that operates in the Russian arms industry, and any designated individual or entity that acts on behalf of, or that provides material or other support to, any senior Russian government official.
"We have fashioned these sanctions to impose costs on named individuals who wield influence in the Russian government and those responsible for the deteriorating situation in Ukraine. We stand ready to use these authorities in a direct and targeted fashion as events warrant."
Voting results indicated nearly 97 percent of voters -- about 1.2 million people -- backed Crimea's joining Russia, said Mikhail Malyshev, chairman of the Supreme Council's referendum commission. About 32 votes were cast for greater autonomy within Ukraine and nine ballots were declared invalid, RIA Novosti reported.
Foreign observers, invited by Crimea's pro-Russian government, said the referendum kept with international norms, VOA said.
The Mejlis, or council, of the Crimean Tatar people strongly condemned the recent acts by Russia as well as Russia's plan to annex Crimea, saying it considers such action a major violation of international law and destabilizing the existing system of international relations, Interfax-Ukraine said. The Crimean Tartar community already recognized the new government in Kiev.
In a statement published Saturday on its website, the Mejlis said it doesn't recognize the Crimean referendum, "the right to decide in which country the Crimean Tatar people should live belongs exclusively to the Crimean Tatars" and Tatars' right to self-determination "should be carried out as part of a sovereign and independent Ukrainian state."