The UN Security Council geared up for an emergency meeting on the crisis as the latest rapid-fire developments sent alarm bells ringing in the United States and Europe.
Ukrainian President Petro Poroshenko held an urgent meeting with his security chiefs after scrapping a visit to Turkey over what a top official described as a "direct invasion" by Russia.
A handout photo provided on August 28, 2014 by DigitalGlobe via NATO allegedly shows Russian self-propelled artillery units set up in firing positions, near Krasnodon, Ukraine. PHOTO: AFP
NATO said at least 1,000 Russian troops were on the ground supporting pro-Kremlin separatists who have been fighting against Kiev's rule since April, but Moscow insisted none of its soldiers were on Ukrainian soil.
US officials accused Russian troops of being behind a lightning counter-offensive that has seen pro-Moscow rebels seize swathes of territory from government forces, dramatically turning the tide in the four-month conflict.
"I will be frank, the situation is extremely difficult," Poroshenko told security chiefs.
"But it is manageable, manageable enough for us not to panic, keep a cool head, good sense and continue calculating our actions," he said.
A handout photo provided on August 28, 2014 by DigitalGlobe via NATO allegedly shows a military deployment site captured on August 20, 2014 (R) on the Russian side of the border near Rostov-on-Don. This location is approximately 31 miles, or 50 kilometres, from the Dovzhansky, Ukraine border crossing. PHOTO: AFP
Kiev said Russian soldiers had seized control of a key southeastern border town and a string of villages in an area where fighting had been raging for days.
"An increasing number of Russian troops are intervening directly in fighting on Ukrainian territory," the US ambassador to Kiev Geoffrey Pyatt wrote on Twitter.
A NATO official said the supply of weapons to the rebels had also increased in both "volume and quantity".
But Russia swiftly denied the allegations, with its envoy to the OSCE pan-European security body insisting: "There are no Russian soldiers in eastern Ukraine."
Britain warned Russia it could face "further consequences" as EU leaders are due to discuss the crisis on their doorstep at a weekend summit.
Fears that the flare-up in the Ukraine conflict could lead to all-out war pushed US stocks into the red at open.
Russia's ruble also sunk to a five-month low as stock markets in the country plummeted over the possibility of new Western sanctions against Moscow.
Kiev had called on the West for urgent help after a rebel counter-offensive from the southeast border appeared to smash through an army blockade around the separatist stronghold of Donetsk and threaten the government-held port city of Mariupol.
The gains by the separatist fighters come after weeks of government offensives that had seen troops push deep into the last holdout rebel bastions in Ukraine's industrial heartland.
Ukraine's Prime Minister Arseniy Yatsenyuk blasted Russian President Vladimir Putin for having "deliberately unleashed a war in Europe" and called urgent action.
A handout photo provided on August 28, 2014 by DigitalGlobe via NATO allegedly shows Russian military units moving in a convoy formation with self-propelled artillery in the area of Krasnodon, Ukraine. PHOTO: AFP
A top rebel leader, Alexander Zakharchenko, admitted Wednesday that Russian troops were fighting alongside his insurgents, but said they were on "holiday" after volunteering to join the battle.
The spiralling tensions come only days after Poroshenko and Putin held their first meeting in three months on Tuesday but failed to achieve any concrete breakthrough despite talk of a peace roadmap.
The EU said it was "extremely concerned" about the escalating developments on its eastern flank and called on Russia to end its "border hostility".
British Prime Minister David Cameron told Russia to "pursue a different path and to find a political solution to this crisis".
"If Russia does not, then she should be in no doubt that there will be further consequences," he said in a statement.
A handout photo provided on August 28, 2014 by DigitalGlobe via NATO allegedly shows six Russian 153mm 2S19 self-propelled guns located in Russia near Kuybyshevo. This site is situated 4 miles, or 6.5 kilometres, south of the Ukraine border, near the village of Chervonyi Zhovten. The guns are pointed north, directly towards Ukrainian territory. PHOTO: AFP
The United States and the EU have already imposed a series of punishing sanctions on Russia over the crisis, the worst standoff between Moscow and the West since the Cold War.
Kiev said Russian troops on Wednesday seized control of the key border town of Novoazovsk and a string of surrounding villages along the southeastern strip of the frontier.
A volunteer pro-Kiev commander said government troops were surrounded in the key transport hub of Ilovaysk some 50 kilometres southeast of Donetsk and were running out of ammunition.
Ukraine's military also claimed a Russian battalion had set up its headquarters near a village in the same area.
AFP journalists reported heavy shelling in Donetsk on Thursday, with local authorities saying 11 civilians had lost their lives in 24 hours.
On Wednesday, the journalists found signs of a hurried retreat by Ukrainian forces after they appeared to have abandoned a key road leading southeast from Donetsk to the Russian border.
Russian Foreign Minister Sergei Lavrov said Wednesday the Kremlin was "not interested in breaking up" Ukraine.
The United Nations estimates the conflict has killed over 2,200 people and forced more than 400,000 to flee since April.
Yatsenyuk said on Wednesday it was time for NATO to act, calling for "practical help" when it holds a summit in Wales next week that will be attended by Poroshenko.
Russia vehemently opposes closer ties between Ukraine and NATO.
And concerns that Kiev could be drawn closer into the Western security alliance -- and towards Europe -- are seen as a key motivation behind Russia's actions in recent months.
Ukraine's ambassador to the EU also appealed for the bloc to agree on "large-scale" military assistance when European leaders meet on Saturday.
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The western media exposed of manipulation and often spinning stories for their own agenda makes it hard to believe them, especially after the Iraq lie at the UN. They must realize that the world uses various media now to get to the truth.