SLAVIANSK (REUTERS) - Armed separatists in the eastern Ukrainian city of Slaviansk seized a bus carrying international observers from the Organisation for Security and Cooperation in Europe (OSCE) on Friday, Ukraine's Interior Ministry said.

The separatist leader in Slaviansk told reporters a problem has arisen when the observers tried to pass a separatist checkpoint, and that there was an Ukrainian "spy" among the group. But he did not say where they were.

The interior ministry in Kiev said the group, which included 7 OSCE representatives and five members of the Ukrainian armed forces, was being held in the building of the state security agency (SBU) in the city which has been occupied by pro-Russian separatists. "Negotiations are going on for their release," a ministry statement said.

Slaviansk, a city of around 130,000, has been for two weeks under the control of separatists who, like similar groups elsewhere in eastern Ukraine, oppose the central government in Kiev after the overthrow of a Kremlin-backed president.

Vyacheslav Ponomaryov, de facto mayor of Slaviansk, told reporters he believed a problem had arisen when the OSCE observers arrived at a checkpoint on the edge of the city manned by separatist fighters. "What the situation was I do not know," he said. "It was reported to me that among them (the OSCE group) was an employee of Kiev's secret military staff. People who come here as observers bringing with them a real spy: it's not appropriate."

Government forces said on Friday that they were gradually tightening a blockade on the city in an "anti-terrorist operation" that was relaunched earlier this week.

Earlier, the German foreign ministry in Berlin said it had been unable to contact a German-led group of international military observers on a mission in the city.

The group comprised three German soldiers, a German translator, and military observers from Czech Republic, Poland, Sweden and Denmark, a spokesman for the ministry said.

"At the moment, talks are going on with representatives of pro-Russian forces. They have refused to free the hostages, saying they want to speak to "competent organs" of the Russian Federation, the Ukrainian interior ministry spokesman said.