SLAVYANSK (AFP) - Pro-Moscow rebels shot down two helicopter gunships on Friday during an assault on the flashpoint Ukrainian town of Slavyansk, prompting a furious Russia to warn that the raid had destroyed a peace deal to defuse the crisis.
Two Ukrainian servicemen were killed in the pre-dawn operation to wrest the eastern town from insurgents' control, authorities in Kiev said.
Moscow said the raid was "leading Ukraine towards catastrophe" and warned that the operation had dealt a death blow to an accord struck in Geneva last month.
That agreement had sought to head off military escalation in Ukraine, over which the East and West are locked in their worst confrontation since the end of the Cold War.
Kiev said Ukrainian commandos had seized control of nine checkpoints around Slavyansk in what a rebel spokesman described as a "full-scale attack" on the town of some 160,000 citizens.
An AFP reporter saw a column of eight armoured vehicles breaching a rebel-held checkpoint just south of Slavyansk and heard explosions and sporadic small arms fire as helicopters circled overhead.
The self-proclaimed pro-Russian mayor of the town, Vyacheslav Ponomaryov, urged "women, children and pensioners to stay in their homes" and "all armed men to help" combat the assault.
"We will defend the town and we will win," the mayor, dressed in camouflage uniform and wearing a bulletproof vest and helmet, said in a video posted on a local website.
The Ukrainian operation marked a dramatic escalation and jeopardised negotiations to release seven inspectors from the Organisation for Security and Cooperation in Europe being held by the Slavyansk insurgents.
The Kremlin said it had an envoy in east Ukraine seeking their freedom.
As the crisis spirals rapidly out of control, US President Barack Obama was due to discuss the West's next move with German Chancellor Angela Merkel at the White House later Friday.
Ukraine's interim president has already reintroduced conscription amid fears of an imminent Russian invasion.
Mr Oleksandr Turchynov has also put his armed forces on "full-combat alert" in response to the estimated 40,000 Russian troops massed on the border.
He has admitted police are powerless to stop a growing insurgency in eastern Ukraine, where pro-Russian rebels have seized control of more than a dozen towns and cities.
Interior Minister Arsen Avakov said on his Facebook page that rebels used shoulder-launched missiles to down the helicopters.
"It's a real battle we are waging against professional mercenaries," he wrote, warning local residents to stay indoors and keep away from windows.
"Our demands for the terrorists are simple: release their hostages, lay down their arms, leave administrative buildings and restore the normal functioning of the urban infrastructure."
One Slavyansk resident, Vladimir Pader, told Russian television: "Everyone - rebels and Slavyansk residents - is determined not to surrender the city."
At a Ukrainian army checkpoint at the entrance to Slavyansk, 12 armoured vehicles and scores of paratroopers fended off angry locals who wanted them to leave.
Central Slavyansk itself remained relatively calm, although rebels parked two previously captured armoured vehicle in front of the town hall where the rebels are holding the seven European Osce monitors they detained on April 25.
In what they called an "anti-terrorist" operation, the Ukrainian forces had for days encircled the town to prevent the insurgents receiving reinforcements.
Russia's foreign ministry said Ukraine's use of its army was a "crime... leading Ukraine towards catastrophe".
"We firmly demand that the West renounce its destructive policies towards Ukraine," the ministry said in a statement.
And Russian news agencies quoted Putin's spokesman Dmitry Peskov as saying the raid was "essentially finishing off the last hope for the feasibility of the Geneva accord".
Russia's envoy to the Osce, Andrei Kelin, said Moscow had urged the pan-European body to "take steps to stop this reprisal raid", according to the Itar-Tass news agency.
Hopes had been raised in recent days that the seven Osce hostages in Slavyansk - four Germans, a Dane, a Czech and a Pole - might soon be released. But Ukraine has accused the rebels of wanting to use them as human shields.
The West and Kiev say the chaos in eastern Ukraine is being sown by Moscow in a bid to destabilise the former Soviet republic ahead of planned presidential elections on May 25.
The Kremlin denies the charges, but has reserved the right to use troops to protect Russian speakers in eastern Ukraine, a region with deep cultural and historical ties to Moscow.
The Western response has been to launch sanctions against members of Putin's inner circle and target key firms in a bid to attack Russia's already recession-hit economy.
Moscow has reacted angrily, threatening to retaliate against Western interests in the lucrative energy sector, but has vowed a measured response.
Later Friday, Russia, Ukraine and the European Union will hold talks over debts running into billions of dollars that state-run Russian gas firm Gazprom says Kiev owes.
Mr Putin has warned that not paying the bill, which Gazprom estimates at US$3.5 billion, could lead to him turning off the taps, which would also affect several European countries.
Kiev is expected to use part of a US$17 billion loan from the International Monetary Fund, announced on Wednesday, to settle the bill.
Financial market analyst Holder Schmieding said the situation in Ukraine was "a whale of a risk" for the European economy.
The unrest in Ukraine started with peaceful demonstrations in Kiev in November against pro-Kremlin president Viktor Yanukovych but has rapidly degenerated into a full-blown global crisis.
After a deadly crackdown on protesters, Mr Yanukovych was forced out in February, sparking fury in Moscow, which responded with a blitz annexation of Crimea.
The pro-Russian rebels, who have been steadily taking more ground in the east, vow to hold their own Crimea-style "referendum" on independence on May 11 - two weeks before the nationwide presidential vote.