The Russian leader had previously tolerated the rantings and threats made by the man nicknamed “Putin’s chef” because catering businesses he owned provided food to the Kremlin, but his patience has finally run out over the current unrest.
The confrontation “represents the most significant challenge to the Russian state in recent times,” according to the UK’s Ministry of Defence.
The crisis came as Prigozhin claimed he and his troops had reached Rostov-on-Don after crossing the Russian border from Ukraineand taken control of key sites including the airfield.
The city is home to the Russian military headquarters that directs operations in Ukraine.
The mercenary force has also seized defence facilities in the city of Voronezh, around 310 miles (500km) south of Moscow, according to the Kremlin.
Prigozhin has vowed to “destroy anyone who stands in our way”.
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“This is not an armed rebellion, but a march of justice,” he said.
But responding in a televised address, Putin said: “It’s the equivalent to armed mutiny.
“Russia will defend itself and repel this move.
“We are fighting the life and security of our citizens.
“It’s an attempt to subvert us from inside.
“This is a stab in the back to our troops and the people of Russia.”
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4:28
Putin and Prigozhin’s relationship explained
He added: “The entire military, economic and information machine of the West is waged against us.
“This battle, when the fate of our people is being decided, requires the unification of all forces, unity, consolidation and responsibility.
“Those who plotted and organised an armed rebellion, who raised arms against his comrades-in-arms, betrayed Russia. And they will answer for it.”
Prigozhin has had a long-running feud with the defence ministry in Moscow led by Sergei Shoigu, who he claimed had targeted his troops and ordered a rocket strike on Wagner’s camps in Ukraine – killing “a huge number of our comrades”.
He said the assault happened after he branded the country’s military top brass “evil” and said the Kremlin’s rationale for invading Ukraine last February was based on lies.
This has been denied by Moscow, which has described the allegations as “untrue and an informational provocation”.
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5:51
Sky News analyses Prigozhin videos
The FSB security service has urged the mercenary fighters not to carry out “criminal and traitorous orders” and to detain Prigozhin.
In a sign of how seriously the Kremlin takes the threat, security was heightened in Moscow.
While the outcome of the confrontation was still unclear, it appeared likely to further hinder Moscow’s war effort as Kyiv’s forces test Russian defences in the initial stages of a counter-offensive.
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The Wagner forces have played a crucial role in Russia’s war in Ukraine, succeeding in taking the city where the bloodiest and longest battles have taken place, Bakhmut.
But Prigozhin has increasingly criticised Russia’s military leadership, accusing it of incompetence and of starving his troops of weapons and ammunition.