Ukrainian troops and pro-Russian separatists were locked in fierce fighting in the east of Ukraine on Thursday and a rebel commander acknowledged big losses among separatists heavily outgunned by government forces.
Even as President Petro Poroshenko and his team prepared to unveil their blueprint for ending more than two months of rebellion, government forces, using artillery and heavy armour, said they were tightening the noose on separatists near Krasny Liman, north of the main regional hub of Donetsk.
Government forces said the fighting erupted in the early hours after rebels refused to lay down their arms as part of Poroshenko's peace plan.
Both Ukrainian government and rebel accounts of the fighting suggested a major battle involving armoured vehicles including tanks.
One military source said 4,000 separatists were involved, while rebels sources in Donetsk said Ukrainian infantry supported by 20 tanks and many other armoured vehicles were storming the village of Yampil, about 12 km (7 miles) east of Krasny Liman.
A top rebel commander, Igor Strelkov, reported "heavy losses" in equipment and arms among the separatists, faced with a huge superiority in heavy armour on the government side at Yampil.
"We beat off the first attack and destroyed one tank. But it is difficult to take on 20 tanks. The battle is going on. Our people are holding but we can't rule out that they (government forces) will break through," Strelkov, who is also known as Girkin, said in a videoed statement. He urged Moscow to "take some measures".
There was no word on casualties from the government side.
From the nearby town of Siversk, artillery blasts, small arms fire and machinegun-fire could be heard from about 3 km away. From high ground, smoke could be seen billowing from rebel positions under attack.
Poroshenko, installed as a president on June 7, is pushing a peace plan to end the rebellion which he said would be unveiled soon and presented to European Union ministers early next week.
It includes an offer of a unilateral ceasefire by government forces and amnesty for the separatists - but only if they lay down their weapons.
Also on Thursday, Ukrainian President Petro Poroshenko said he would sign an association agreement with the European Union on June 27 and would also send his new foreign minister to Luxembourg next week to lay out a peace plan for the east to EU ministers.
Poroshenko made his comments after presenting Pavlo Klimkin, who was earlier endorsed as foreign minister by parliament, to the media.
Klimkin commented: "Our priorities are obvious - they are a peace plan (for eastern Ukraine) and association with the EU."
Referring to plans to sign the association agreement, Poroshenko said: "That for which we have waited for so long will take place next week."
Gas dispute:
Russian President Vladimir Putin discussed the potential cost for Europe of Russia's gas dispute with Ukraine in a telephone call with his German and French counterparts, the Kremlin said in statement on Thursday.
In a three-way call with German Chancellor Angela Merkel and French President Francois Hollande, Putin also voiced "serious concern" over Ukraine's military operation against a pro-Russian uprising in the east, it said.
"They also discussed the potential consequences for Europe's energy security and economy of the failure of negotiations with Kiev on the settlement of its debt for Russian gas deliveries," the Kremlin said.
Russia's Gazprom on Thursday said the termination of a contract with Ukraine's state-owned gas company Naftogaz, which compensates Kiev if it needs to use its gas to meet additional demand from Europe, would not affect supplies to Europe.
"Termination of this agreement by Gazrpom Export does not affect the reliability of supplies through Ukraine," the company said in a statement.
This comes after Ukraine's state-owned gas company Naftogaz said Russia's Gazprom wants to end a contract which compensates Ukraine if it needs to use its gas to meet additional demand from Europe.
"On Tuesday ... Gazprom Export, which deals with Russian gas exports, informed the operator of the Ukrainian gas transport system, Ukrtransgaz, about its wish to terminate a contract which provides compensation to the Ukrainian side for fluctuations in daily consumption volumes of gas to Europe," Naftogaz said in a statement.
It said the agreement would be terminated on June 23.
OSCE:
The OSCE has re-established contact with two teams of observers that went missing in eastern Ukraine last month, a spokesman for the democracy watchdog said on Thursday, adding that its monitors were unharmed.
"We now have contact with both teams," a spokesman for the Organization for Security and Cooperation in Europe said, adding the contacts had been re-established in the past 48 hours.
"We know that the first ones, the ones that were taken longer ago are alive and unharmed," the spokesman said.
Asked about the second group, the spokesman said: "They are fine as well."
The security and rights watchdog lost contact with the international monitoring teams late in May amid intense fighting between the Ukrainian army and pro-Russian fighters engulfing the eastern flatlands of the former Soviet republic.
Four monitors from the OSCE's Donetsk team went missing on May 26 and four members of the Luhansk team disappeared on May 29.
The spokesman said the OSCE had not established contact with its monitors' captors, but added that diplomatic efforts were continuing to secure their release.
NATO:
NATO Secretary-General Anders Fogh Rasmussen said on Thursday that at least a few thousand more Russian troops were now at Ukraine's eastern border, a build-up he called a regrettable step backwards.
"We now see a new Russian military build-up around the Ukrainian border. At least a few thousand more Russian troops are now deployed," Rasmussen said in London.
"I consider this a very regrettable step backwards. It seems Russia keeps the option open to intervene further in Ukraine," he said. "The international community would have to respond in a firm manner if Russia were to intervene further in Ukraine."
He added: "That would imply deeper ... economic sanctions against Russia which would have a very damaging effect on the Russian economy."
Central bank:
The Ukrainian parliament on Thursday overwhelmingly approved investment banker Valeria Hontareva as the new head of the central bank, as nominated by President Petro Poroshenko.
In a brief comment to parliament after the vote, Hontareva, who has worked for leading Ukrainian and international financial institutions in Ukraine for 18 years, said: "My appointment can be seen as a positive signal for bankers and a positive signal for international investors."
REUTERS