Ukraine and the West yesterday said that Russian troops were actively involved in the fighting tearing apart the east of the country, raising fears of a direct military confrontation between Kiev and its former Soviet master.
The UN Security Council geared up for an emergency meeting on the crisis as European leaders warned Moscow to change course or suffer "very serious consequences."
Ukrainian President Petro Poroshenko described the situation as "extremely difficult" but "manageable for us not to panic", as security chiefs announced that mandatory army conscription will restart in the autumn.
Nato said at least 1,000 Russian troops were on the ground supporting pro-Kremlin separatists who have been fighting against Kiev's rule since April.
A senior Ukrainian diplomat earlier decried the move as a "direct invasion" but Moscow insisted none of its soldiers were on Ukrainian soil.
US officials accused Russian troops of being behind a lightning counter-offensive that has seen pro-Moscow rebels seize swathes of territory from government forces, dramatically turning the tide in the four-month conflict.
State Department spokeswoman Jen Psaki said Russian President Vladimir Putin had a choice to make over whether he wanted his people to feel the effects of deepening sanctions.
Psaki, however, appeared to rule out a military response to the crisis.
Kiev said Russian soldiers had seized control of a key southeastern border town and a string of villages in an area where fighting had been raging for days.
The US ambassador to Kiev Geoffrey Pyatt wrote on Twitter that Moscow's troops were now "directly involved in the fighting" in Ukraine.
EU leaders also warned of possible further penalties, with German Chancellor Angela Merkel saying a summit which is scheduled for tomorrow will discuss new sanctions.
Fears that the flare-up in the Ukraine conflict could lead to all-out war pushed stocks down in Europe and US.
Kiev had called on the West for urgent help after a counter-offensive from the southeast border smashed through an army blockade around the separatist stronghold of Donetsk and threatened the government-held port city of Mariupol.
The gains by the separatist fighters come after weeks of government offensives that had seen troops push deep into the last holdout rebel bastions in Ukraine's industrial heartland.
Ukraine's Prime Minister Arseniy Yatsenyuk blasted Russian President Vladimir Putin for having "deliberately unleashed a war in Europe" and pleaded for urgent action.
Yatsenyuk said on Wednesday it was time for Nato to act, calling for "practical help" when it holds a summit in Wales next week that will be attended by Poroshenko.
The spiralling tensions come only days after Poroshenko and Putin held their first meeting in three months on Tuesday but failed to achieve any concrete breakthrough despite talk of a peace roadmap.
Kiev said Russian troops on Wednesday seized control of the key border town of Novoazovsk and a string of surrounding villages along the southeastern strip of the frontier. Ukraine's military also claimed a Russian battalion had set up its headquarters near a village in the same area, while local authorities in Donetsk said 26 people had been killed in heavy shelling since Wednesday.
The latest claims of Russian manoeuvres are sparking fears that Moscow is seeking more than Crimea, which it annexed in March in the face of Western outrage.
The United Nations estimates the conflict has killed over 2,200 people and forced more than 400,000 to flee since April.
Russia vehemently opposes closer ties between Ukraine and Nato.
And concerns that Kiev could be drawn closer into the Western security alliance -- and towards Europe -- are seen as a key motivation behind Russia's actions in recent months.