Ukrainian President Petro Poroshenko said on Thursday that Russian forces had entered his country and the military conflict was worsening after Russian-backed separatists swept into a key town in the east.

Poroshenko said he was cancelling a visit to Turkey and conferring with defense chiefs because of the "rapidly deteriorating situation" in the eastern Donetsk region, "as Russian troops have actually been brought into Ukraine."

 According to Dutch Brigadier-General Nico Tak, head of NATO's crisis management center, satellite images showed well over 1,000 heavily armed Russian troops are supporting separatists and engaged in military operations inside Ukrainian territory.

Russia says it has no involvement in the conflict between pro-Moscow rebels and the Ukrainian military, in which more than 2,200 people have been killed since April.

It denies sending in weapons or troops, despite the capture of 11 soldiers inside Ukraine this week who Moscow said had probably crossed the border by accident. Russia's envoy to the OSCE security forum in Vienna said no Russian forces were crossing the Ukrainian border "at any point."

A rebel leader said their objective was Mariupol, a major port and industrial center further west.

The latest sharp escalation in the crisis came only two days after the presidents of both countries held their first talks in more than two months and agreed to work towards launching a peace process.

Ukraine's security and defense council said the border town of Novoazovsk and other parts of Ukraine's south-east had fallen under the control of Russian forces.

"A counter-offensive by Russian troops and separatist units is continuing in south-east Ukraine," it said on Twitter.

It said Ukrainian government forces had withdrawn from Novoazovsk "to save their lives" and were now reinforcing defenses in Mariupol.

Ukrainian Prime Minister Arseny Yatseniuk appealed to the US, EU and G7 countries "to freeze Russian assets and finances until Russia withdraws armed forces, equipment and agents."

French President Francois Hollande said it would be "intolerable and unacceptable" if it was proved true that Russian troops had entered Ukrainian territory.

European shares fell sharply on the news, halting a three-day global rally.

Rebel advances this week have opened a new front in the conflict just as Ukraine's army appeared to have gained the upper hand, virtually encircling the separatists in their main strongholds of Donetsk and Lugansk.

Russia's defense ministry declined to comment on reports of Russian tanks in Novoazovsk. A Russian diplomatic source said: "The Russian authorities clearly said many times there are no regular Russian troops there. Russia is not taking part in this armed conflict."

A Reuters reporter in southern Russia saw a column of armored vehicles and dust-covered troops, one of them with an injured face, about 3 kilometers from the border with the part of Ukraine which Kiev says is occupied by Russian troops. The column was driving east, away from the border, across open countryside near the village of Krasnodarovka, in Russia's Rostov region.

None of the men or vehicles had standard military identification marks, but the reporter saw a Mi-8 helicopter with a red star insignia, consistent with Russian military markings, land next to a nearby military first aid tent.

The loss of Novoazovsk on the Sea of Azov is a blow to Ukrainian government forces since it leaves vulnerable the large port city of Mariupol, further west along the coast. A resident, Mykola, said there were tanks in the streets.

The European Commission announced financial support for exporters of dairy products hit by Russia's ban on Western food imports, adding to emergency measures already taken to help fruit and vegetable producers.

Moscow this month imposed a one-year embargo on meat, fish, dairy, fruit and vegetables from the US, the EU, Canada, Australia and Norway in retaliation for Western economic sanctions over Moscow's involvement in Ukraine.