Ukraine troops and pro-Russian separatists are engaged in combat inside the flashpoint town of Debaltseve, both sides said, in a significant blow to a fragile three-day-old ceasefire.
It is the first time fighting has erupted on the streets of Debaltseve, which up until now had witnessed artillery exchanges between thousands of government troops holed up inside and heavily armed rebels encircling the town.
Ukrainian military spokesman Alexander Motuzyanik said: "Battles are going on right now with rebels storming our positions."
"Groups of rebel fighters are penetrating into the town itself."
Deputy regional police chief Ilya Kiva said separatist fighters were using mortars, rocket propelled grenades and automatic rifles.
"There are wounded and killed but we cannot confirm the numbers yet as the battles are still continuing," Mr Kiva said.
An unnamed rebel military official told the separatists' news agency that insurgents controlled the train station and the eastern outskirts but said it was "not a large part of the town".
Russian news agency Interfax quoted an unnamed rebel source as saying the separatists were conducting "mopping up operations".
The street fighting in Debaltseve represents a new stage in the battle for the strategic town after weeks of fierce clashes around the key location.
Violence has continued unabated in the railway junction that links the two rebel centres of Donetsk and Luhansk despite the official start Sunday of a ceasefire hammered out by the leaders of Ukraine, Russia, Germany and France.
Russia and the rebels claim up to 8,000 Ukrainian troops are trapped in the vital transport hub but Kiev has so far officially refused to accept that its forces are surrounded.
Earlier, government forces and separatists both said they will not carry out an agreement to pull back heavy guns in east Ukraine, pushing a shaky ceasefire closer to collapse.
Fighting has eased in many areas since a ceasefire came into force on Sunday, but the rebels have refused to halt attacks on Debaltseve.
Ukrainian forces say they will not pull back its big guns until the truce holds.
Monitors from the OSCE security group were expected to try to reach the besieged town after Germany said it had agreed steps with the leaders of Russia and Ukraine to ensure the observers had "free access" in the east.
However a call by Berlin for the withdrawal of heavy weaponry to start seemed to have fallen on deaf ears, though officials from Russia, Ukraine, the OSCE and the separatists were expected to discuss implementation of the peace deal by phone.
"We do not have the right (to stop fighting for Debaltseve). It's even a moral thing. It's internal territory," Denis Pushilin, a senior separatist representative, said in the rebel stronghold of Donetsk.
Asked about plans to carry out the agreement to withdraw big guns, he said: "We are ready at any time, we have everything ready for a mutual withdrawal. We will not do anything unilaterally. That would make our soldiers targets."
Ukraine's military reiterated that its forces could also not start withdrawing big weapons such as heavy artillery, as set out in the deal reached at marathon talks brokered by France and Germany in the Belarussian capital of Minsk last Thursday.
"The pull-back can happen only on fulfilment of the first point of the Minsk agreements - the ceasefire. 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 either," military spokesman Andriy Lysenko said.
Asked whether the pull-back could start without a ceasefire at Debaltseve, a strategic railway junction, he said: "The Minsk agreements talk about a general ceasefire. So my answer is 'No, not possible'."
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