President Vladimir Putin asked Russia's upper house on Tuesday to revoke the right it had granted him to order a military intervention in Ukraine in defense of Russian-speakers there.
Minutes before he spoke, Kiev said pro-Russian rebels in east Ukraine had shot down a military helicopter, most likely killing all nine on board. It was the most serious breach of a temporary ceasefire agreed in talks between government and rebels less than 24 hours earlier.
Putin's move received a cautious welcome in the West as a sign Moscow was ready to help engineer a settlement in Ukraine's largely Russian-speaking east, where a pro-Russian uprising against Kiev began in April.
Ukrainian President Petro Poroshenko called it a "first practical step" following Putin's statement of support last weekend for Poroshenko's peace plan for eastern Ukraine.
But later he told security chiefs to "open fire without hesitation" if government forces came under attack, and "did not rule out bringing the ceasefire regime to an early end" if rebels continued to breach it, his press service said.
Putin himself said he now expected Ukraine to begin talks on guaranteeing the rights of its Russian-speaking minority, which Russia would continue to defend.
"It is not enough to announce a ceasefire," he told reporters on a visit to Vienna. "A substantive discussion of the essence of the problems is essential."
In the March 1 resolution, the Federation Council had granted Putin the right to "use the Russian Federation's Armed Forces on the territory of Ukraine until the social and political situation in that country normalises".
That resolution, together with Russia's March annexation of Crimea from Ukraine, helped push East-West relations to their lowest ebb since the Cold War and led the United States and Europe to impose sanctions on Moscow.
The Federation Council was due to discuss the reversal requested by Putin on Wednesday and expected to approve it.
NATO spokeswoman Oana Lungescu said: "We expect Russia to withdraw its troops and military infrastructure from the Ukrainian border, end its support for armed separatist groups, and the flow of weapons and mercenaries across its border, as well as denounce publicly separatist violence in Ukraine."
A spokeswoman for EU foreign policy chief Catherine Ashton declined comment when asked whether Putin’s step would reduce the likelihood of tougher sanctions being agreed at an EU summit in Brussels on Friday.
The White House welcomed Putin's backing for the ceasefire, but said there must be "tangible actions" to defuse the crisis.
U.S. Vice President Joe Biden spoke with Poroshenko on Tuesday and "underscored the importance of having monitors in place to verify violations of the ceasefire, as well as the need to stop the supply of weapons and militants from across the border," the White House said.
Even the limited sanctions already imposed by Washington and the EU have chilled investor sentiment in Russia at a time when its economy is already on the brink of recession.
However, signs that the crisis in eastern Ukraine may be easing have helped markets regain ground. News of Putin's decision on Tuesday pushed the rouble-based MICEX .MCX up 2.2 percent to its highest level since November, and the dollar-denominated RTS index .IRTS up 3.8 percent to its highest close since January.
At 17:30 GMT, the rouble RUB= was up 0.9 percent against the dollar, which fell below 34 roubles for the first time since January.
There was no word on the progress of peace talks, at which Russia and the Organization for Security and Cooperation in Europe are represented alongside rebel leaders and Kiev's representative, former president Leonid Kuchma.
But it was clear that the ceasefire, due to expire on Friday morning, was under heavy strain.
The Ukrainian helicopter downed near the rebel stronghold of Slaviansk was carrying technicians who were installing equipment to monitor violations of the peace plan, the government said.
Igor Strelkov, the top rebel commander in Slaviansk, was quoted on a rebel Facebook page as saying: "Talks with them (the Kiev government) are possible only from a position of strength."
Elsewhere, a witness said rebels had opened fire on two Ukrainian armored personnel carriers leaving Donetsk airport, which is under government control. Kiev said three servicemen were killed in rebel attacks on military posts and checkpoints. But rebels accused government forces of firing first.
Putin himself appeared to cast doubt on a central element of Poroshenko's plan: that rebels should lay down their weapons.
He said it was "pointless" to demand this when far-right militants who had helped to topple Moscow-backed president Viktor Yanukovich in February had not been disarmed by Kiev.
Russia itself has already pulled back tens of thousands of troops it had moved close to the border earlier in the crisis.
Those troops had also provided an unspoken threat to support the well-equipped but sometimes disunited rebels in eastern Ukraine against government forces trying to wrest back the towns and administration buildings they had seized.
Like many of eastern Ukraine's Russian speakers, Moscow was infuriated by the fall of Yanukovich after he pulled out of an association agreement with the EU in favor of closer relations with Moscow, Kiev's former master within the old Soviet Union.
Russia denies accusations from Kiev and the West that it has helped foment the separatist unrest and knowingly allowed military equipment to cross into Ukraine or built up forces along the 1,900-km (1,200-mile) joint border.
However, the election last month of billionaire businessman Poroshenko as president appears at least to have reduced fears in Moscow and eastern Ukraine that the ex-Soviet republic was being run by far-right nationalists ready to trample over the rights of the large Russian-speaking minority in the east.
Since then, the rebels have been gradually losing ground in a conflict where scores have been killed on both sides.
On Friday, Poroshenko is set to sign a free trade agreement with the EU - the very pact that Yanukovich rejected in January under heavy pressure from Russia, which had wanted Ukraine's 45 million people to join its own Eurasian Economic Union.
Russia is certain to respond by raising trade barriers to Ukrainian exports in order to protect its markets, further fraying an economic relationship already badly soured by Ukraine's refusal to accept an increase in the price of Russian gas, imposed after Yanukovich was ousted.
Russia's Gazprom GAZP.MM has now cut off the gas, and its CEO Alexei Miller repeated on Tuesday in Vienna that Kiev must settle $1.95 billion of its debt and pay up front for future supplies before the taps can be reopened.