Ukraine and the West say Russian troops are actively involved in the fighting tearing apart the east of the country, raising fears of a direct military confrontation between Kiev and its former Soviet master.
The UN Security Council geared up for an emergency meeting on the crisis on Thursday as the latest rapid-fire developments sent alarm bells ringing in the US and Europe.
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NATO accuses Russia of 'operating in Ukraine'
The military alliance says Russian artillery units are positioned near Krasnodon, Ukraine, inside territory controlled by Russian separatists.
Ukrainian President Petro Poroshenko held an urgent meeting with his security chiefs over what a top official described as a "direct invasion" by Russia.
He said he was cancelling a trip to Turkey "as Russian troops have actually been brought into Ukraine".
A senior NATO official said "well over a thousand" Russian troops were operating inside the country supporting pro-Kremlin separatists who have been fighting against Kiev's rule since April, but Moscow insisted none of its soldiers were on Ukrainian soil.
"They support separatists, fighting with them and fighting amongst them," the NATO official said on condition of anonymity, adding that the supply of arms by Russia had increased in both "volume and quality".
US officials accused Russian troops of being behind a lightning counter-offensive that has seen pro-Moscow rebels seize swathes of territory from government forces, dramatically turning the tide in the four-month conflict.
"I will be frank, the situation is extremely difficult," Poroshenko told security chiefs.
"But it is manageable, manageable enough for us not to panic, keep a cool head, good sense and continue calculating our actions," he said.
Kiev said Russian soldiers had seized control of a key southeastern border town and a string of villages in an area where fighting had been raging for days.
Ukraine's ambassador to the Organisation for Security and Cooperation in Europe accused Russia of a "direct invasion".
"The situation has significantly aggravated," Kiev's envoy Ihor Prokopchuk told journalists following a special meeting of the European security body to discuss the latest developments.
He described Russia's latest moves as a repeat of its strategy in the Crimean peninsula, which Moscow annexed from Ukraine in March after initially denying its troops were there.
"An increasing number of Russian troops are intervening directly in fighting on Ukrainian territory," the US ambassador to Kiev Geoffrey Pyatt wrote on Twitter.
But Russia swiftly denied the allegations, with its envoy to the OSCE pan-European security body insisting: "There are no Russian soldiers in eastern Ukraine."
"There is only one unit of Russian soldiers as they unintentionally crossed the border a couple days ago," he said, referring to 10 paratroopers that Kiev said it had captured on Tuesday.
EU leaders are due to discuss the crisis at a weekend summit.
Fears that the flare-up in the Ukraine conflict could lead to all-out war pushed US stocks into the red at open.
Russia's ruble also sunk to a five-month low as stock markets in the country plummeted over the possibility of new Western sanctions against Moscow.
Kiev had called on the West for urgent help after a rebel counter-offensive from the southeast border appeared to smash through an army blockade around the separatist stronghold of Donetsk and threaten the government-held port city of Mariupol.
The gains by the separatist fighters come after weeks of government offensives that had seen troops push deep into the last holdout rebel bastions in Ukraine's industrial heartland.
Ukraine's Prime Minister Arseniy Yatsenyuk blasted Russian President Vladimir Putin for having "deliberately unleashed a war in Europe" and called urgent action.
A top rebel leader, Alexander Zakharchenko, admitted Wednesday that Russian troops were fighting alongside his insurgents, but said they were on "holiday" after volunteering to join the battle.
The EU has called on Russia to end its "border hostility".
British Prime Minister David Cameron told Russia to "pursue a different path and to find a political solution to this crisis".
"If Russia does not, then she should be in no doubt that there will be further consequences," he said in a statement.
Yatsenyuk said on Wednesday it was time for NATO to act, calling for "practical help" when it holds a summit in Wales next week that will be attended by Poroshenko.
Russian and separatist 'counter-offensive'
Earlier, a combined force of Russian forces and separatists moved into Novoazovsk, which has been under pressure from them for two days. They now had the potential to threaten Mariupol, a port city further along the Sea of Azov coast.
"A counter-offensive by Russian troops and separatist units is continuing in south-east Ukraine," Ukraine's defence and security council said in a post on Twitter.
It said Ukrainian government forces had withdrawn from Novoazovsk "to save their lives" and were now reinforcing defences in Mariupol, which has been under government control for several weeks after being briefly under rebel control early in the five-month conflict.
The council said Russian forces and separatists were combining to launch a counter-offensive on Ilovaysk and Shakhtarsk, east of the big city of Donetsk.
Mr Poroshenko, standing at Kiev's airport in light rain with his back to the presidential plane he was to have boarded for Turkey, referred specifically to the worsening military situation near Amvrosiyivka and Starobesheve, east of Donetsk.
Earlier, a military source said the separatist forces had also taken Savur-Mohyla, a hill east of Donetsk which gives strategic command over large areas of the territory.
The sudden reverses for the Ukrainian military appeared to confirm the arrival of Russian forces to support the separatists, who have in recent weeks been under pressure from government forces in their strongholds of Donetsk and Luhansk, the east's two main cities.
"There is military equipment in Novoazovsk which came across the border two days ago from Russia," a fighter, from the so-called Azov battalion, which supports the Ukrainian army, told Reuters by telephone.
"The equipment is carrying the flags of the DNR (Donetsk People's Republic) rebels but they are regular Russian forces," said the fighter who did not wish to be identified by name.
Separately, a resident of the town on the Sea of Azov, who would only give his first name of Mykola, said: "The authorities in the town are DNR ones. Tanks are moving here and there out on the highway, but there is no fighting going on for the town."
Novoazovsk has been under pressure for the past two days from an armoured column which the Ukrainians say came in across the border from Russia and headed south towards the Sea of Azov.
The loss of Novoazovsk, which was confirmed unofficially by a Kiev military source who did not want to be named, is a blow to government forces.
If Mariupol were to fall to Russian-backed forces, they would have the potential to thrust north to reinforce separatist rebels who have been hemmed in in Donetsk by government forces for weeks.
The US ambassador to Kiev, Geoffrey Pyatt, said in a Tweet: "Russian supplied tanks, armoured vehicles, artillery and multiple rocket launchers have been insufficient to defeat Ukraine' armed forces. So now an increasing number of Russian troops are intervening directly in fighting on Ukrainian territory.
"Russia has also sent its newest air defence systems including the SA-22 into eastern Ukraine & is now directly involved in the fighting," he said.