Cameron, who was in Canberra to address Australia's parliament, said existing sanctions imposed by the West were having an impact on Russia's economy.
The West's relations with the Kremlin have become more tense since the downing of Flight MH17 over territory controlled by pro-Russian separatists in eastern Ukraine in July, killing 298 passengers and crew.
"Russian action in Ukraine is unacceptable," Cameron told reporters before heading to the G20 leaders summit in Brisbane where he will rub shoulders with Russian President Vladimir Putin.
"If Russia takes a positive approach towards Ukraine's freedom and responsibility, we could see those sanctions removed.
"If Russia continues to make matters worse, we could see those sanctions increase. It's as simple as that."
European nations, the United States and Australia are among countries that have imposed sanctions on Russia for what they see as Moscow's desire to redraw modern Europe's borders.
Russia yesterday refuted the West's claims that it has been sending fresh military hardware into eastern Ukraine, which could fuel a return to all-out conflict.
Pro-Russian rebels have been fighting Ukrainian forces since April in a war which has claimed more than 4,000 lives and driven hundreds of thousands of people from their homes.
Australian Prime Minister Tony Abbott said the Kremlin's increasing military assertiveness including the appearance of four Russian navy ships off his country's north coast ahead of the G20 was "part of a regrettable pattern".
"Whether it's the bullying of Ukraine, whether it's the increasing Russian military aircraft flying into the airspace of Japan, European countries, whether it's the naval task group which is now in the south Pacific, Russia is being much more assertive now than it has been for a very long time," Abbott said in a joint press conference with Cameron.
"Interestingly, Russia's economy is declining even as Russia's assertiveness is increasing.
"Russia would be so much more attractive if it was aspiring to be a superpower for peace and freedom and prosperity instead of trying to recreate the lost glories of tsarism or the old Soviet Union."
Putin is set to arrive in Brisbane later Friday, with Abbott's latest remarks coming after a highly anticipated exchange between the two leaders at the Asia-Pacific Economic Cooperation (APEC) meeting in Beijing earlier this week.