Russian President Vladimir Putin yesterday sharply raised the stakes in the Ukraine conflict by calling for the first time for statehood to be considered for the restive east of the former Soviet state.
Putin's defiant remarks came just hours after the European Union gave Moscow -- which the bloc accuses of direct involvement in the insurgency -- a week to change course or face new sanctions.
"We need to immediately begin substantive talks... on questions of the political organisation of society and statehood in southeastern Ukraine," the Russian leader was quoted by Russian news agencies as saying.
Moscow has previously only called for greater rights under a decentralised federal system to be accorded to the eastern regions of Ukraine, where predominantly Russian-speakers live.
But Putin has this week sparked renewed speculation that he may be seeking to create a statelet in south-east Ukraine, after he employed a loaded Tsarist-era name "Novorossiya" to refer to the region.
Putin's tough talk also comes as rebels turned the tide on advancing Ukrainian troops, by snatching a series of towns and trapping the army in some.
Nato last week accused Moscow of sending at least 1,000 troops to fight alongside the rebels, and presented satellite imagery showing artillery, tanks and armoured vehicles crossing the border.
German Chancellor Angela Merkel said the new sanctions would build on existing measures against Russia which mainly cover financial services, armaments and energy.
Although Russia continues to deny direct involvement in the conflict, it admitted that Russian paratroopers had been captured in Ukraine, but alleged they crossed the border by accident.
Yesterday, Russian and Ukrainian officials confirmed that a prisoner swap had taken place on the northeastern border with Ukraine.
"Nine Russian paratroopers were given to the Russian side" on Saturday evening, Lysenko said. A few hours later, 63 Ukrainian soldiers were handed over by Russia.