SLAVYANSK - The United States warned Russia Thursday against making an "expensive mistake" in Ukraine, as Moscow ordered new military exercises on its shared border after Kiev forces attacked pro-Kremlin rebels.
US Secretary of State John Kerry warned that Russia's refusal to take any steps to end the crisis in Ukraine would prove costly, saying the window for Moscow to change course was closing.
He accused Moscow of a "full-throated effort to actively sabotage the democratic process through gross external intimidation" and described new Russian military exercises on the border of Ukraine on Thursday as "threatening".
"Let me be clear: if Russia continues in this direction it will not just be a grave mistake, it will be an expensive mistake," the veteran diplomat said, adding "we are ready to act" as Washington tees up new economic sanctions against Moscow.
Russia ordered the new military exercises on its border with Ukraine Thursday after Kiev launched a deadly assault against pro-Kremlin rebels occupying the flashpoint town of Slavyansk, in an escalation of the crisis.
'We will not back down'
But Ukraine's acting President Oleksandr Turchynov vowed to push on with the offensive to put down the rebellion in the east.
"We will not back down from the terrorist threat," Turchynov said in a televised address, telling Russia to stop interfering in Ukraine's internal affairs.
The rocketing tensions sent oil prices up, as US President Barack Obama, who has deployed troops to boost NATO's defences in eastern European states, also accused Russia of reneging on a Geneva agreement to defuse the crisis.
Russian Foreign Minister Sergei Lavrov in turn attacked the United States and the European Union of "trying to use Ukraine as a pawn in a geopolitical game".
UN chief Ban Ki-moon warned the crisis threatened to "spin out of control" and urged all sides to "refrain from violence".
In Slavyansk several armoured vehicles backed by commandos on foot arrived after shooting was heard on its outskirts, AFP correspondents in the town said.
The vehicles withdrew just a few hours later, leaving the insurgents, who had pulled back, to again assert full control over the town.
No reason was given for the retreat, but Ukrainian authorities had said they wanted to avoid casualties in the town where they said civilians were being used as "human shields".
Ukraine's interior ministry said five militants were killed in the offensive, but the rebels said two of their members died.
'This war machine'
The assault on Slavyansk followed two other clashes in east Ukraine.
The defence ministry said an army base in Artemivsk had also repelled an assault by around 100 separatists. One soldier was wounded.
And in the port city of Mariupol, Interior Minister Asen Avakov said special forces retook the occupied town hall with no casualties.
Thursday's violence was the worst to erupt since the deal done in Geneva between Kiev, Moscow and the West aimed at defusing tensions.
Russian President Vladimir Putin warned there would be "consequences" upon learning of the Slavyansk assault.
His Defence Minister Sergei Shoigu claimed that Ukraine had mobilised 11,000 troops, 160 tanks and gangs of extremists "against peaceful civilians".
"If this war machine is not stopped today, then it will lead to a large number of dead and wounded," he said, as Moscow ordered tactical battalions among its estimated 40,000 troops massed on Ukraine's border to conduct a new "exercise" in response to the offensive.
The show of force came a day after Moscow said it would respond as it did in Georgia in 2008, if its interests in Ukraine were attacked.
Russia sent troops into South Ossetia in August 2008 after then president of Georgia Mikheil Saakashvili sought to reestablish control over the breakaway region.
US threatens sanctions
Obama accused Moscow of failing to abide by the Geneva deal, which required militias to disarm and cede control of seized buildings.
"We continue to see malicious, armed men taking over buildings, harassing folks who are disagreeing with them, destabilising the region and we haven't seen Russia step out and discouraging it," he said.
Kiev, he said, had sought to enact the accord by pledging an amnesty for the rebels, and to protect the Russian language and decentralise power.
The United States has threatened fresh sanctions against Russia if it further escalates the situation.
While Obama has ruled out sending US or NATO forces into Ukraine, Washington has begun deploying 600 US troops to boost NATO's defences in nearby eastern European states.
France also said it was sending four fighter jets to join NATO air patrols over the Baltic states.
Meanwhile, American journalist Simon Ostrovsky, abducted Monday by the rebels in Slavyansk was freed late Thursday.
In other developments, the International Monetary Fund said it would on April 30 make a final decision on a huge rescue plan near-bankrupt Ukraine has requested.
The global crisis lender agreed tentatively last month to lend Kiev $14-18 billion over two years to lead a broader support package for the economy.
The amount is part of a larger $27 billion plan announced on March 28 to help the new government salvage the country's finances while pressing for reforms.
And Slovakia and Ukraine said after talks with the European Union in Bratislava they could sign a deal on European gas supplies to Kiev on Monday to help reduce it reliance on Russian supplies.
"Ukraine wants to get reverse gas flow as soon as possible but it needs more gas than it can get under the framework offered by Slovakia to secure its energy security," Ukrainian Energy Minister Yuri Prodan told reporters.
He did not specify how much gas Ukraine would need beyond the maximum 10 billion cubic metres a year that EU member Slovakia has proposed.