Ukrainian President Petro Poroshenko accused Russia on Monday of "direct and open aggression" which he said had radically changed the battlefield balance as Kiev's forces suffered a further reverse in the war with pro-Moscow separatists.
Ukraine's military said its troops had been ordered to pull back from a vital airport in the east of the country, near the city of Luhansk, where they had been battling a Russian tank battalion.
Poroshenko said in a speech there would be high-level personnel changes in the Ukrainian armed forces, whose troops fled a new rebel advance in the south which Kiev's Western allies say has been backed up by Russian armored columns.
Russian President Vladimir Putin, who called on Sunday for immediate negotiations on the "statehood" of southern and eastern Ukraine, blamed Kiev's leadership for refusing to enter into direct political talks with the separatists.
Putin also hoped "common sense" would prevail in the West over the possibility of imposing additional economic sanctions, despite Moscow's denials that it is helping the rebels. China weighed in, saying more measures would only complicate the crisis, but German Chancellor Angela Merkel stressed that accepting Russia's behavior was not an option.
Until last week Ukraine had appeared close to crushing the four-month rebellion in the east, which erupted after a pro-Moscow president was forced out of power by popular protests. But then the rebels opened a new front to the south on the coast of the Sea of Azov, pushing towards the city of Mariupol.
Poroshenko repeated Kiev's belief that Russian forces are helping the rebels to turn the tide of the war.
"Direct and open aggression has been launched against Ukraine from a neighboring state. This has changed the situation in the zone of conflict in a radical way," he said in his speech at a military academy in Kiev.
Speaking during a visit to Siberia, Putin repeated his call for talks. "The current Kiev leadership does not want to carry out a substantive political dialogue with the east of its country," state news agency Itar-Tass cited him as telling journalists.
Putin also said the separatists were trying to force Ukrainian troops from their current positions where they were firing on civilian targets. "The aim of the militia fighters is to push away these armed forces and their artillery to not give them the possibility to shoot on residential areas," he said.
On Sunday, Putin's spokesman said the president's call for talks on the "statehood" of southern and eastern Ukraine did not mean Moscow now endorsed rebel calls for independence for territory they have seized.
Asked if "New Russia", a term pro-Moscow rebels use for their territory, should still be part of Ukraine, spokesman Dmitry Peskov said: "Of course."
"Only Ukraine can reach an agreement with New Russia, taking into account the interests of New Russia, and this is the only way to reach a political settlement."
Putin made his statehood remarks two days after comparing the Kiev government with Nazis and warning the West not to "mess with us". Europe and the United States are preparing possible further economic sanctions to halt what they say is direct Russian military involvement in the war in Ukraine.
Putin called for the European Union to think twice about stepping up the sanctions, which were first imposed after Russia's annexation of Ukraine in March. "I hope that common sense will prevail and we will work in a normal modern way," the Interfax news agency reported him as saying.
He won support from China, with which Putin wants to trade more as the West tightens its restrictions.
"A political solution is the only way out. Sanctions do not help to solve the underlying problems in Ukraine," Chinese Foreign Ministry spokesman Qin Gang said at a daily news briefing. "It may lead to new and more complicating factors."
However, Merkel took a hard line, even though she acknowledged the sanctions have also hurt German exporters to the Russian market.
"I have to say there is also an impact when you are allowed to move borders in Europe and attack other countries with your troops," she told a news conference in Berlin. "Accepting Russia's behavior is not an option. And therefore it was necessary to prepare further sanctions."
The United States and EU extended the sanctions to target Russia's financial, defense and oil industries in July after a Malaysian airliner was shot down over rebel territory, killing 298 people. Moscow has responded by banning the import of most Western foodstuffs and shutting down McDonald's restaurants but so far energy shipments to the EU have been unaffected.
PROTECTING OUR ECONOMY
Russian Foreign Minister Sergei Lavrov hinted at further retaliation. "We will first of all start from our own interests - protect our economy, protect our social sphere, protect our businesses and at the same time draw conclusions from the actions of our partners," he said.
Lavrov said there would be no military intervention from Russia in Ukraine. Moscow denies the presence of Russian tanks and troops there, despite what NATO and Western governments have said is overwhelming evidence to the contrary.
The conflict moved onto the sea for the first time on Sunday when the separatists said they had fired on a Ukrainian vessel in the Azov Sea using land-based artillery.
A Ukrainian border guard official said on Monday that the coast guard cutter had been sunk. "We managed to save eight sailors, thanks to other cutters coming to their rescue. Seven of them are injured or burned. Two sailors have gone missing. We are continuing rescue operations," the official, Serhiy Astakhov, told Reuters.
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