Ukrainian President Petro Poroshenko said on Thursday that Russian forces had entered his country and the military conflict was worsening after Russian-backed separatists swept into a key town in the east.
Poroshenko said he was cancelling a visit to Turkey and conferring with defense chiefs because of the "rapidly deteriorating situation" in the eastern Donetsk region, "as Russian troops have actually been brought into Ukraine".
A NATO military officer said: "We assess well over 1,000 Russian troops are now operating inside Ukraine... They are supporting separatists (and) fighting with them."
Russia says it has no involvement in the conflict between pro-Moscow rebels and the Ukrainian military, in which more than 2,200 people have been killed since April.
It denies sending in weapons or troops, despite the capture of 11 soldiers inside Ukraine this week who Moscow said had probably crossed the border by accident. Russia's envoy to the OSCE security forum in Vienna said no Russian forces were crossing the Ukrainian border "at any point".
A rebel leader said their objective was Mariupol, a major port and industrial center further west.
The latest sharp escalation in the crisis came only two days after the presidents of both countries held their first talks in more than two months and agreed to work towards launching a peace process.
Ukraine's security and defense council said the border town of Novoazovsk and other parts of Ukraine's south-east had fallen under the control of Russian forces.
"A counter-offensive by Russian troops and separatist units is continuing in south-east Ukraine," it said on Twitter.
It said Ukrainian government forces had withdrawn from Novoazovsk "to save their lives" and were now reinforcing defenses in Mariupol.
Ukrainian Prime Minister Arseny Yatseniuk appealed to the United States, European Union and G7 countries "to freeze Russian assets and finances until Russia withdraws armed forces, equipment and agents".
French President Francois Hollande said it would be "intolerable and unacceptable" if it was proved true that Russian troops had entered Ukrainian territory.
European shares fell sharply on the news, halting a three-day global rally..
Rebel advances this week have opened a new front in the conflict just as Ukraine's army appeared to have gained the upper hand, virtually encircling the separatists in their main strongholds of Donetsk and Luhansk.
Anton Gerashchenko, an adviser to Ukrainian Interior Minister Arsen Avakov, said on Facebook: "The invasion of Putin’s regular Russian army of Ukraine is now an established fact!"
Russia's defense ministry declined to comment on reports of Russian tanks in Novoazovsk. A Russian diplomatic source said: “The Russian authorities clearly said many times there are no regular Russian troops there. Russia is not taking part in this armed conflict."
But a member of President Vladimir Putin's advisory council on human rights, Ella Polyakova, told Reuters she believed Russia was carrying out an invasion of Ukraine.
"When masses of people, under commanders' orders, on tanks, APCs and with the use of heavy weapons, (are) on the territory of another country, cross the border, I consider this an invasion," Polyakova told Reuters.
A Reuters reporter in southern Russia saw a column of armored vehicles and dust-covered troops, one of them with an injured face, about 3 km (2 miles) from the border with the part of Ukraine which Kiev says is occupied by Russian troops.
The column was driving east, away from the border, across open countryside near the village of Krasnodarovka, in Russia's Rostov region.
None of the men or vehicles had standard military identification marks, but the reporter saw a Mi-8 helicopter with a red star insignia -- consistent with Russian military markings -- land next to a nearby military first aid tent.
All the uniformed men Reuters spoke to declined to say whether or not they were in the Russian military.
Tanks in Novoazovsk
The loss of Novoazovsk on the Sea of Azov is a blow to Ukrainian government forces since it leaves vulnerable the big port city of Mariupol, further west along the coast. A resident, Mykola, said there were tanks in the streets.
A military source said the separatist forces had also taken Savur-Mohyla, a hill east of the city of Donetsk which gives strategic command over large areas of the territory.
Alexander Zakharchenko, prime minister of the self-proclaimed Donetsk People's Republic, told Reuters in an interview that the rebels' objective was to fight their way to Mariupol.
"Today we reached the Sea of Azov, the shore, and the process of liberating our land, which is temporarily occupied by the Ukrainian authorities, will keep going further and further," Zakharchenko said in Donetsk, the main rebel stronghold.
He said there were about 3,000 Russian volunteers serving in the rebel ranks.
The U.S. ambassador to Kiev, Geoffrey Pyatt, tweeted: "Russian supplied tanks, armored 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 defense systems including the SA-22 into eastern Ukraine & is now directly involved in the fighting," he said.
The crisis has prompted Western governments to impose sanctions on Moscow, which has responded in kind, and fanned tensions with NATO to levels not seen since the Cold War.
A senior German conservative politician called for further European Union sanctions against Russia.
Fighting in the east erupted in April, a month after Russia annexed Ukraine's Crimean peninsula in response to the toppling of a pro-Moscow president in Kiev.
A United Nations report this week said more than 2,200 people have been killed, not including the 298 who died when a Malaysian airliner was shot down over rebel-held territory in July.