NIKISHINE, Ukraine (REUTERS) - Pro-Russian rebels and government forces fought street-to-street in a strategic town in east Ukraine on Tuesday and refused to pull back their heavy guns, all but scuppering hopes that a European-brokered peace deal will end months of conflict.
Two days after a truce went into effect, the agreement reached at all-night talks in the Belarussian capital Minsk last Thursday was unravelling rapidly.
The Moscow-backed rebels say the ceasefire does not apply to the main battle front at the town of Debaltseve, astride a railway hub, where they have a Ukrainian military garrison surrounded. They have continued an all-out assault.
Kiev acknowledged that rebels had fought their way into the town and captured some of its troops defending it.
Both sides had been due to being withdrawing heavy guns on Tuesday, but Kiev says it cannot do so as long as the rebels show no sign of halting their advance.
Journalists near the snowbound front line said artillery rounds rocked Debaltseve every five seconds and black smoke rose skywards as Grad rockets pounded the town.
"Eighty per cent of Debaltseve is already ours," said Eduard Basurin, a rebel leader. "A cleanup of the town is under way.
Kiev's military denied the town, which had a peacetime population of 25,000 but is now a bombed-out wasteland, had fallen but acknowledged losing control of some of it.
Some Ukrainian soldiers had been captured, it said, but denied rebel reports that up to 300 had surrendered or been taken prisoner.
Kiev and NATO say the rebel military operation to take Debaltseve is being carried out with the assistance of tanks, artillery and soldiers from Russia's army. Moscow denies that it has sent its forces to participate in battle for territory that President Vladimir Putin has referred to as "New Russia".
Hopes that the deal reached last Thursday would end a conflict that has killed more than 5,000 people were always low after a rebel advance in January ended an earlier truce.
But the ferocity of the fighting at Debaltseve was unexpected and has heightened concerns in Kiev and the West that the separatists and Putin want to cement the latest rebel gains before allowing any peace to take hold.
Russia has already annexed Ukraine's Crimea peninsula, and Western countries believe Putin's goal is to establish a "frozen conflict" in eastern Ukraine similar to Russian-occupied protectorates in Georgia and Moldova.
Military trucks and tanks came and went in the largely destroyed village of Nikishine as the rebels pounded nearby Debaltseve with rockets, heavy artillery and mortar bombs.
"We'll take Debaltseve. It will all be ours. Our homeland will remain our homeland," said a rebel tank operator who gave his name only as Bass, his nom de guerre.
Observers from the OSCE security group, tasked with monitoring the ceasefire under last week's agreement, had hoped to gain access to the besieged town, but were barred from entering by the rebels.
A new call for peace by Germany, whose Chancellor Angela Merkel was the driving force behind the peace deal after marathon diplomacy last week, fell on deaf ears. "We do not have the right (to stop fighting for Debaltseve). It's even a moral thing. It's internal territory," said Denis Pushilin, a senior separatist figure. The goal would be"destroying the enemy's fighting positions".
In Kiev, Ukrainian Petro Poroshenko, in a decree, set out the timetable for the next rounds of military call-up for the rest of the year for men up to 27 years of age.
Ukraine's military reiterated in Kiev that its forces could not pull back their big guns while the rebels were still firing.
"In the last 24 hours there has been firing so there is no ceasefire and so there is no precondition for a pull-back of heavy weapons," Lysenko said.
Rebel official Pushilin told Reuters the separatists would not pull back their guns unless Kiev did: "We will not do anything unilaterally. That would make our soldiers targets" he said in Donetsk, the main city in the east and seat of one of two self-proclaimed rebel "people's republics".
The head of the other rebel republic, Luhansk, said some weapons were pulled back there. This could not be independently confirmed.
The European Union announced a new list of separatists and Russians targeted with visa bans and asset freezes on Monday. It is also considering more far-reaching economic measures. Moscow promised an "adequate" response.
The United States, which is considering sending arms to aid Kiev, said it was "gravely concerned" by the fighting at Debaltseve and that it was monitoring reports of a new column of Russian military equipment heading to the region.
Fighting began in east Ukraine after the overthrow of a Moscow-backed president in Kiev a year ago and Russia's annexation of the Crimea peninsula a month later.
Several hundred thousand refugees have fled the conflict, which has devastated Ukraine's economy, and relations between Russia and the West are at their worst since the Cold War.