KIEV (AFP) - Ukraine's military is "on full combat alert" against a possible invasion as pro-Russian insurgents tightened their grip on the increasingly chaotic east of the country.

Rebels stormed the regional police building and town hall in the eastern Ukrainian city of Gorlivka, local officials told AFP, bringing to more than a dozen the number of locations under their control.

The new seizure followed clashes in nearby Lugansk late on Tuesday, as hundreds of pro-Russia protesters spearheaded by a heavily armed mob took control of the police station after a fraught stand-off.

Ukraine's interim president Oleksandr Turchynov told his cabinet that the nation's armed forces were on "full combat alert" as fears grew in Kiev that Russia could mount an armed invasion of the ex-Soviet republic.

"The threat of a Russia starting a war against mainland Ukraine is real," he said.

He urged "Ukrainian patriots" to bolster the beleaguered police force, which he has criticised for "inaction and in some cases treachery".

His priority was to prevent "terrorism" spreading in the restive east of the country, he said.

The West has accused Russia of fomenting the crisis and backing the rebels and has imposed sanctions to try to get Moscow to back down. The United States and EU members see the insurgency as a bid to destabilise Ukraine ahead of presidential elections slated for May 25, but Moscow denies it has a hand in the rebellion.

President Vladimir Putin insisted to reporters late on Tuesday that there were "neither Russian instructors, nor special units, nor troops" operating in Ukraine.

Opening up another front in the war of words between Washington and Moscow, Mr Putin warned that the sanctions against his country could harm Western interests in Russia's lucrative energy sector.

"If this continues, we will of course have to think about how (foreign companies) work in the Russian Federation, including in key sectors of the Russian economy such as energy," said Mr Putin, speaking at a regional summit in Minsk.

The Russian president's comments threaten the operations of some of the world's biggest energy companies in the resource-rich country - once viewed as a reliable alternative to unstable natural gas and oil-producing countries in the Middle East.

Among those targeted by the US sanctions is the president of Rosneft, Russia's top petroleum company and one of the world's largest publicly traded oil companies. The EU said talks with Russia and Ukraine will take place in Warsaw on Friday to try to resolve a US$3.5-billion (S$4.4 billion) gas bill Gazprom calculates Kiev owes. Mr Putin has threatened to cut off the gas flow to Ukraine if it is not quickly paid.

Russian officials have accused the United States of wanting to reinstitute "Iron Curtain"-style policies and warned the sanctions would "boomerang" back to hurt it.

But the tensions are already having an impact on the Russian economy, as the International Monetary Fund announced on Wednesday that the country was already "experiencing recession".

The IMF also drastically slashed its 2014 growth forecast for Russia to 0.2 per cent from 1.3 per cent, amid massive capital outflows over the Ukraine crisis. US moves to restrict high-tech exports to Russia appeared to touch a nerve in Moscow which warned Washington was "exposing their astronauts" on the International Space Station to consequences.

Moscow has also taken aim at Japan and the EU, which it accused of "doing Washington's bidding" for joining in the coordinated sanctions push. But Washington would not let up on Moscow, as relations between them reached a low not seen since the end of the Cold War.

Vowing to "defend every single inch" of Nato territory, US Secretary of State John Kerry urged Moscow to "leave Ukraine in peace". Ukraine is not a member of the North Atlantic Treaty Organisation (NATO), but several of its European neighbours are.

Nato has said there was no indication Moscow was making good on its pledge to pull back its tens of thousands of troops from the border. The Pentagon is looking at additional support measures for its eastern European Nato allies increasingly worried over Russia's military actions. In particular, the US is planning to beef up training exercises planned for June in the Baltic states.