Ukrainian forces killed up to five pro-Moscow rebels Thursday (24 April) as they closed in on the separatists' military stronghold in the east, and Russia launched army drills near the border in response, raising fears its troops would invade.
The Ukrainian offensive amounts to the first time Kyiv's troops have used lethal force to recapture territory from the fighters, who have seized swaths of eastern Ukraine since April 6 and proclaimed an independent "People's Republic of Donetsk".
Ukraine's acting president accused Moscow of supporting "terrorism at the state level" against his country for backing the rebels, whom the government blames for kidnapping and torturing a politician found dead on Saturday.
"The window to change course is closing," US Secretary of State John Kerry warned in a hastily arranged appearance in the State Department, where he cited President Barack Obama's comments earlier on Thursday that Washington was ready to impose new sanctions if Moscow did not alter its policy.
In unusually blunt comments, Kerry accused Russia of using propaganda to hide what it was actually trying to do in eastern Ukraine - destabilize the region and undermine next month's planned Ukrainian presidential elections.
"So following today's threatening movement of Russian troops right up to Ukraine's border, let me be clear," Kerry said. "If Russia continues in this direction, it will not just be a grave mistake, it will be an expensive mistake."
Russian President Vladimir Putin said sanctions were "dishonourable" and destroyed the global economy, but that so far the damage to Russia had not been critical.
A spokesman to Putin said the latest developments raised serious question about the legitimacy of the 25 May presidential election in Ukraine.
With Washington frustrated by the reluctance of some European nations to act, Obama was expected to speak to European leaders on Friday to try to nudge the European Union towards fresh sanctions against Russia, sources familiar with the matter said.
The sources said Obama was expected to hold a conference call on Friday with British Prime Minister David Cameron, French President François Hollande, German Chancellor Angela Merkel and Italian Prime Minister Matteo Renzi.
‘Russia supporting terrorism’
"At the state level, Russia is supporting terrorism in our country," Ukraine's acting president, Oleksander Turchinov, said in a national address on Thursday. "Armed criminals have taken over buildings, are taking citizens, Ukrainian and foreign journalists, hostage and murdering Ukrainian patriots."
Turchinov called for the eastern offensive this week after the apparent torture and murder of a pro-Kyiv town councillor whose body was found on Saturday near Slaviansk.
Volodymyr Rybak had disappeared after being filmed trying to take down a separatist flag while attempting to enter the rebel-held town hall where he worked in Horlivka, near Slaviansk.
"He was bruised and punctured from head to toe ... it's clear they tortured him," said Aleksander Yaroshenko, a family friend who accompanied Rybak's widow when she identified his body at the morgue. "The police have lots of details, they have CCTV footage, they should know who did this," he told Reuters.
Rebels in Slaviansk released U.S. citizen Simon Ostrovsky, one of three journalists they were believed to be holding.
Moscow called for Kyiv to release "political prisoners", including a pro-Russian activist named Pavel Gubarev.
US troops arrive in Poland
So far, the United States and the EU have taken only mild action against Moscow, imposing visa bans and asset freezes on a few Russians, measures Moscow has scoffed at as meaningless. Washington and Brussels both say they are drafting more serious sanctions and will impose them if the Geneva deal collapses.
Even without serious sanctions, Russia's confrontation with the West has hurt its economy as fearful investors send their money abroad. Mutual funds specialising in Russia and Eastern Europe were the 30 worst performers out of 3,489 equity funds for sale in Britain in the three months ending in March.
But Moscow also flexed its economic muscles, with the government suggesting foreign firms that pull out may not be able to get back in. A source at Gazprom said the Russian gas exporter had slapped an additional $11.4 billion (€8 billion) bill on Kyiv [read more]. Ukraine is negotiating to reverse east-west pipelines so that it can receive gas from Europe if Moscow cuts it off.
In NATO-member Poland, the first group of a contingent of about 600 US soldiers arrived on Wednesday, part of an effort by Washington to reassure Eastern European allies who are worried by the Russian buildup near Ukraine's borders.
But NATO and the United States have made clear they will not use military force to protect Ukraine itself.
Ukraine, a former Soviet republic, slid into unrest late last year when Moscow-backed President Viktor Yanukovich rejected a pact to build closer ties with Europe. Protesters took over central Kyiv and he fled in February. Days later, Russian troops seized control of Crimea.
Unarmed mediators from the Organization for Security and Cooperation in Europe are in eastern Ukraine trying to persuade pro-Russian gunmen to go home, in line with the Geneva accord.
Reuters reporters have not been able to establish that any Russian troops or special forces members are on the ground, although Kyiv and Western powers say they have growing evidence that Moscow has a presence. Masked gunmen in the east, widely referred to as "green men", wear uniforms without insignia.