Russia will not change its course despite pressure from the West, Medvedev said.
"It's senseless to pressure Russia with sanctions," Medvedev said at a meeting with Russian business leaders. "They can shut a couple of sources of (revenue) to a banana republic and make its situation dramatic. It won't work like that here."
Without mentioning any specific nation, Medvedev warned that attempts to punish Russia would also hurt the West.
"Sanctions is a weapon that will backfire," he said. "If attempts are made to introduce sanctions, damages will be symmetrical."
After Russia's war with Georgia last month, some diplomats and politicians in the West called for expelling Russia from the Group of Eight leading industrialized nations and blocking its bid to join the World Trade Organization. No sanctions have been imposed so far.
Medvedev said Russia would like to join the World Trade Organization but would not be pressured into concessions.
"WTO isn't a carrot; it entails a lot of difficult obligations," he said. "And if we do it, let us do it in a normal way without them trying to scare us."
The president also said Russia would not respond to international tension by becoming isolationist.
"We don't need an isolation or an arms race, it's a road to nowhere," he said.
Medvedev's latest warning to the West came as NATO's chief arrived in Georgia to show support for the pro-Western nation after its war with Russia.
NATO Secretary-General Jaap de Hoop Scheffer led a delegation of ambassadors from all 26 alliance members for a two-day visit starting Monday. He said the visit would help in assessing "how to further enhance" the partnership.
De Hoop Scheffer said NATO wanted to show support for Georgia after what he has called Russia's use of disproportionate force against its smaller neighbor.
Georgia's president has angered Russia with his pursuit of NATO membership. Last week he said Russia went to war to keep Georgia out of the alliance and warned NATO not to let Moscow get its way through force.
On Monday, President Mikhail Saakashvili told reporters he hoped the military alliance would "accelerate" the process to bring his country into the fold.
Meanwhile, the European Commission on Monday proposed a $700 million aid package over three years to help Georgia recover from its conflict with Russia.
EU External Relations Commissioner Benita Ferrero-Waldner said she hopes European Union foreign ministers will approve the money at a meeting Monday.
"The European Union must undertake a very significant financial effort," she told reporters. "We have to go beyond the ongoing assistance."
She says the "stability and growth package" designed to run from 2008-2010 will assist people displaced by the conflict, help to rebuild, support Georgia's economic stability and finance the construction of new infrastructure.
The EU ministers were also expected to agree to send a 200-strong civilian observer mission to Georgia, meant to verify Russian troop withdrawals from parts of Georgia outside of South Ossetia and Abkhazia, the two breakaway provinces.
Diplomats said the mission would last for one year, and cost the EU $44 million. France was to provide the biggest contingent of the unarmed observers - around 70.