The pan-Africa bloc's Peace and Security Council said in a statement it would "take appropriate measures, including targeted sanctions, against all those who incite people to violence, including along ethnic lines".
The warning comes as rebels battled government troops in a bid to retake the flashpoint town of Bor, dashing hopes a looming ceasefire deadline in the war-torn nation would be heeded.
The AU, meeting in Banjul in The Gambia yesterday, expressed "Africa's dismay and disappointment that the continent's newest nation should descend so quickly into civil strife, with the potential of rapidly deteriorating into ethnic clashes and a full-fledged civil war".
Regional leaders at the Inter-Governmental Authority on Development (IGAD) have demanded Machar hold face-to-face talks with Kiir by today, but there seems to be little chance of the deadline being met.
The AU called on all sides to "immediately and unconditionally cease hostilities", and said it would work with IGAD to prepare sanctions.
