Pro-Russian rebels have shot down two of Ukraine’s army helicopters during an “anti-terror” operation in the eastern city of Sloviansk, Kiev has said.
It said a pilot and serviceman had been killed, four suspected separatists held and nine rebel checkpoints seized.
However, separatists at three Sloviansk checkpoints told the BBC they were still in control there.
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”.
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 in that several foreign journalists have been detained in Sloviansk.
Sloviansk is a stronghold for pro-Russian separatists who are exerting increasing control in the region.
In other developments:
- Unknown attackers seize a local railway control centre near Donetsk, disrupting train movement
- Moscow has reportedly re-established contact with Russian envoy Vladimir Lukin in eastern Ukraine, after saying earlier it had been unable to get in touch with him
- Pro-Russian rebels have left the prosecutor’s office and TV centre in the eastern Luhansk region
‘Full combat alert’
In a statement on Friday , Ukrainian Interior Minister Arsen Avakov said the “active phase” of the operation began at 04:30 local time (02:30 GMT).
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,” Mr 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, says the BBC’s Sarah Rainsford, who is in the regional capital Donetsk.
In a video posted on YouTube, Sloviansk’s self-declared mayor Vyacheslav Ponomariov said “our city is under attack… and we have already suffered casualties”.
“I would like to appeal to all children, women and the elderly not to leave their homes.”
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 had calmed down but remained tense.
Earlier, Ukraine’s acting President Olexandr Turchynov reinstated military conscription.
Mr Turchynov said his forces were “helpless” to quell the unrest in some parts of the east, saying the goal was now to prevent it from spreading.
He also said Ukraine was on “full combat alert” amid fears that Russian troops could invade.
Some 40,000 Russian troops are stationed near the Ukrainian border.
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.
Russia then annexed the Crimean peninsula – part of Ukraine but with a Russian-speaking majority – in a move that provoked international outrage.
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 Putin to help free foreign military monitors seized by rebels in Sloviansk last week.
For his part, Mr Putin reiterated his call for Kiev to withdraw troops from the south-east to open the way for a national dialogue.