Ukraine has accused rebels and Russia of destroying a fragile three-day-old ceasefire after insurgents armed with automatic weapons and rocket-propelled grenades stormed a flashpoint town and engaged thousands of troops there in intense combat.

“The hopes of the world for peace are being destroyed,” the deputy head of Ukraine’s presidential administration, Valeriy Chaly, told a news conference in Kiev on Tuesday.

“Russia and the DNR (the rebels’ self-styled breakaway Donetsk republic) are not abiding by the agreement” underpinning the truce, he said, warning that the situation was careening towards “further escalation”.

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Fierce fighting was raging in the streets of Debaltseve, a strategic railway hub between the main rebel-held cities of Donetsk and Lugansk, according to both Kiev officials and pro-Russian rebels.

“Street battles are continuing and the rebels are attacking the town in groups with support from artillery and heavy armour,” the Ukraine defence ministry said in a statement. “Part of the town has been captured by the bandits.”

Rebels quoted by Russian-language news agencies said their fighters rushed in from the north and the east of Debaltseve and had taken its vital railway station.

Many of the Ukrainian troops were killed and taken prisoner, they claimed.

Some 80 per cent of the town was now in rebel hands, the “defence minister” of the separatist Donetsk republic, Vladimir Kononov, told Russian news outlet LifeNews.

Pro-Russian rebels load ammunition onto a truck during the ceasefire. Photo: Getty

Ukrainian officials denied the rebel casualty and prisoner claims, but admitted that an unspecified number of soldiers in an ambushed supply convoy were seized after a battle outside Debaltseve on Monday.

They also said 10 soldiers had been killed since the start of the truce on Sunday, several of them in or around Debaltseve.

Russia and the rebels claim some 8000 Ukrainian soldiers are in the town, and thousands of trapped civilians are cowering in cellars with little food or water.

Up until Tuesday, the heavily armed rebels who had all but surrounded Debaltseve had been pounding it with rockets and mortars.

The separatists have for days blocked access to the town to journalists and monitors from the Organization for Security and Cooperation in Europe (OSCE) seeking to enter to verify conditions.

Tuesday’s combat dealt a harsh blow to the shaky, European-mediated ceasefire.

Both sides have refused to pull back their heavy weapons all along the frontline in Ukraine’s east because of what each said was violations of the truce by the other.

That step, and others, had been agreed by Kiev and the rebels last week after painstaking peace talks in Belarus between the leaders of Ukraine, Russia, Germany and France.

The pro-Russian rebels have argued that Debaltseve was well in their territory behind the frontline so should not be included in the ceasefire agreement.

But Ukraine described it as a finger of territory it controlled and therefore subject to the truce.