Vladimir Putin has urged the Ukrainian government to allow its troops to surrender to rebels in the strategic town of Debaltseve.
The Russian president also said he hoped the rebels would let any captured troops return to their families.
Fierce fighting raged throughout Tuesday in Debaltseve despite a ceasefire deal signed last week, with rebels saying they now controlled most areas.
The UN Security Council called for an immediate end to hostilities.
On Tuesday evening a resolution drafted by Russia calling on all sides to respect the deal, signed in the Belarusian capital Minsk last week, was adopted unanimously by the council.
International observers monitoring the truce have been unable to enter Debaltseve.
Debaltseve has become a key prize for rebels and government forces, as it sits on a strategic railway line linking rebel-held Donetsk and Luhansk.
Ukrainian President Petro Poroshenko described rebel attempts to take the town as a “cynical attack” on the ceasefire.
“Today the world must stop the aggressor,” Petro Poroshenko said in statement posted on his website following a phone conversation with German Chancellor Angela Merkel.
“I call on the permanent members of the UN Security Council to prevent further violation of fundamental principles and rules of the UN and the unleashing of a full-scale war in the very centre of Europe,” he said.
Speaking on a visit to Hungary, President Vladimir Putin said he hoped the ceasefire agreements would be observed by both sides.
Vladimir Putin said there had been a “significant reduction” in the intensity of combat since the truce came into effect over the weekend.
He said the conflict could not be solved by military means.
“I hope that the Ukrainian authorities are not going to prevent the Ukrainian soldiers from laying down their weapons,” he said.
“If they aren’t capable of taking that decision themselves and giving that order, then [I hope] that they won’t prosecute people who want to save their lives and the lives of others.”
Vladimir Putin added that the fighting in Debaltseve was “understandable and predictable”.
He said he had warned participants in the Minsk talks that – ceasefire or no ceasefire – encircled government troops would try to break free and the rebels would try to prevent this.
Meanwhile, sources in the self-proclaimed Donetsk People’s Republic (DPR) said Debaltseve police station and railway station had been taken, and at least 80% of the city was under rebel control.
According to later reports, the city’s military HQ – where many government troops are based – has also been surrounded.
The rebels said that up to 300 Ukrainian troops in Debaltseve had surrendered, and Russian TV showed footage of what it said were 72 captured soldiers.
Ukraine said a group had been taken prisoner after an ambush but denied large-scale surrenders.
The Ukrainian military said there was intense fighting in the streets and confirmed that the rebels were in control of parts of the city.
Although Debaltseve has suffered weeks of artillery exchanges, correspondents say this is the first fierce fighting inside the town.
Most of its 25,000 population have been evacuated but about 7,000 civilians are still believed trapped by the fighting, according to Amnesty International.
The ceasefire, which came into effect on February 15, has been broadly observed but separatists insist the agreement does not apply in Debaltseve because they have the town almost surrounded.
Both sides have also failed to pull back heavy weapons from the front line.
The withdrawal was due to start no later than the second day after the truce came into effect and be completed within two weeks, creating buffer zones 30-85 miles wide.
Officials say more than 5,400 people have been killed since the conflict erupted in eastern Ukraine in April 2014, but the UN believes the actual death toll to be much higher.
Ukraine’s pro-Western government says Russia is supporting the separatists with troops and weapons, but the Kremlin has consistently denied this.
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