Sloviansk separatists have shot down two of Ukraine’s army helicopters during an “anti-terror” operation in the eastern city, Kiev says.
Ukraine’s military said a pilot and serviceman were killed and nine rebel checkpoints seized.
Russia says Kiev’s actions “killed the last hope” for a deal agreed last month in Geneva aimed at defusing the crisis.
President Vladimir Putin’s spokesman Dmitry Peskov also described Ukraine’s operation as “punitive”.
Dmitry Peskov said that contact had been lost with Russian envoy Vladimir Lukin sent to the south-eastern Ukraine.
Russia’s foreign ministry earlier warned that any assaults by Ukraine’s troops in the region would have “catastrophic consequences”, triggering fears of an invasion by Moscow.
Separately, reports are coming that several foreign journalists have been detained in Sloviansk.
Sloviansk separatists have shot down two of Ukraine’s army helicopters during an anti-terror operation (photo Reuters)
Sloviansk is a stronghold for pro-Russian separatists who are exerting increasing control in the region.
In a statement on Friday, Ukrainian Interior Minister Arsen Avakov said the “active phase” of the operation began at 04:30 local time.
He said interior troops and the National Guard were involved in the operation in the Sloviansk-Kramatorsk region.
“The terrorists opened fire with heavy weapons against Ukrainian special units.
“A real battle with professional mercenaries is going on,” Arsen Avakov said, adding that the separatists were using the tactics of hiding behind civilians in residential buildings.
Russia’s state-run Rossiya 24 TV channel said the city was being “stormed”.
It quoted Sloviansk’s rebel leader Igor Strelkov as saying that the city was completely sealed off.
The fighting appears to be concentrating on the periphery of the city.
However, there were no reports of Ukrainian government troops entering the city itself.
Local residents were later quoted as saying that the situation in the city calmed down but remained tense.
Earlier, Ukraine’s acting President Oleksandr Turchynov reinstated military conscription.
Eastern Ukraine has a large Russian-speaking population and was a stronghold for President Viktor Yanukovych before he was overthrown by pro-Western protesters in February.
The crisis has plunged East-West relations to their lowest point since the Cold War ended in the early 1990s.
On Thursday, German Chancellor Angela Merkel asked Russia in a phone call to President Vladimir Putin to help free foreign military monitors seized by rebels in Slovianks last week.
For his part, Vladimir Putin reiterated his call for Kiev to withdraw troops from the south-east to open the way for a national dialogue.
Angela Merkel is due to meet President Barack Obama in Washington on Friday to discuss the crisis in Ukraine.
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Pro-Russian militants in Donetsk say they will not leave the government building there, defying the Kiev authorities and threatening a new international deal on Ukraine.
The separatists’ spokesman said that the Kiev government was “illegal”, so they would not go until the Kiev government stepped down.
Russia, Ukraine, the EU and US earlier agreed that illegal military groups in Ukraine must leave official buildings.
They reached the deal in Geneva.
Pro-Russian militants in Donetsk say they will not leave the government building there, defying the Kiev authorities and threatening a new international deal on Ukraine
Alexander Gnezdilov, spokesman for the self-proclaimed Donetsk People’s Republic, said his group would evacuate the government building in the eastern city only when the “illegal” Kiev government vacated parliament and the presidential administration.
A tense standoff continues in eastern Ukraine, where pro-Russian separatists – many of them armed – are occupying official buildings in at least nine cities and towns.
Another protest leader in Donetsk said the separatists would not leave unless pro-European demonstrators in Kiev’s Maidan Square packed up their camp first.
President Barack Obama cautiously welcomed the Geneva deal, but warned that the US and its allies were ready to impose new sanctions on Russia if the situation failed to improve.
On Friday there were reports of some shooting in Serhiyivka, in Donetsk region.
Ukrainian paratroopers opened fire to remove a protesters’ roadblock in Serhiyivka, Interfax-Ukraine reported, quoting local sources. The details have not been confirmed.
Russia denies fomenting separatism in eastern and southern Ukraine.
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Oleksandr Turchynov – Ukraine’s interim president – has warned of the dangers of separatism following the ousting of President Viktor Yanukovych.
Many in Ukraine’s Russian-speaking regions oppose his overthrow and the installation of a more European-leaning interim administration.
Russia is also angry at the changes, but Foreign Minister Sergei Lavrov has said Moscow will not intervene.
The formation of a unity government has been delayed until Thursday.
Addressing parliament, Oleksandr Turchynov said he would meet law enforcement agencies to discuss the risk of separatism in regions with large ethnic Russian populations.
Separatism was a “serious threat”, he said.
Ukraine’s interim President Olexander Turchynov has warned of the dangers of separatism following the ousting of President Viktor Yanukovych
Crimea and some pro-Russian areas in the east have seen protests against the overthrow of Viktor Yanukovych, sparking fears of secession.
The delay in announcing a unity government was to allow further consultations, Oleksandr Turchynov said, adding that “a coalition of national faith must be elected”.
Russia has been vehemently opposed to the changes in Ukraine, with PM Dmitry Medvedev saying on Monday that those behind the new administration had conducted an “armed mutiny”.
At a news conference in Moscow on Tuesday, Sergei Lavrov warned other states against seeking “unilateral advantages” in Ukraine, but said Russia’s “policy of non-intervention” would continue.
“It is dangerous and counter-productive to try to force on Ukraine a choice according to the principle of either being with us or against us,” he said.
Sergei Lavrov added that “it is in our interest for Ukraine to be part of the broad European family” but against Russia’s interest to “allow the radicals and nationalists who are clearly trying to take centre stage to prevail.”
It is still unclear where Viktor Yanukovych is, but an arrest warrant has been issued. He was last reportedly seen on Sunday in Balaklava on the Crimean peninsula.
Acting Interior Minister Arsen Avakov said a criminal case had been opened against the ousted president and other officials over “mass murder of peaceful citizens”.