By Anton Zverev
NIKISHINE, Ukraine (Reuters) - Pro-Russian rebels fought their way into an encircled government bastion and were battling street-to-street on Tuesday, all but dashing hopes that a European-brokered peace deal would end months of conflict.
Two days after a truce went into effect, an agreement reached at all-night talks in the Belarussian capital Minsk last week was unravelling rapidly, with both sides refusing to begin pulling back heavy guns on Tuesday as required.
The failed ceasefire has left thousands of Ukrainian troops surrounded, their fate uncertain. The rebels said they had captured hundreds of them and would not let the rest escape unless they surrender. Ukraine said some of its troops had been taken prisoner but denied the number captured was that high.
The Moscow-backed rebels say the ceasefire does not apply at all to the main battle front at the town of Debaltseve, astride a railway hub where they have continued an all-out assault.
The fighting meant both sides spurned a deadline on Tuesday to being withdrawing heavy guns from the frontline. Kiev says it cannot pull guns back as long as the rebels show no sign of halting their advance.
Reuters journalists near the snowbound frontline said artillery rounds rocked Debaltseve every five seconds and black smoke rose skywards as Grad rockets pounded the town.
"Eighty percent of Debaltseve is already ours," said Eduard Basurin, a rebel leader. "A cleanup of the town is under way."
He later said negotiations were under way for 5,000 Ukrainian troops trapped in the town to surrender. "Hundreds" had been captured and would eventually be released to their families.
Ukrainian President Petro Poroshenko called the rebel assault on the town a cynical attack on the Minsk agreement.Kiev's military denied the town, which had a peacetime population of 25,000 and is now a bombed-out wasteland, had fallen, but acknowledged losing control of some of it. Some Ukrainian soldiers had been captured, it said, but not hundreds.
Kiev and NATO say the rebel military operation to take Debaltseve is being carried out with the assistance of tanks, artillery and soldiers from Russia's army. Moscow denies that it has sent its forces to participate in battle for territory that President Vladimir Putin has referred to as "New Russia".
Washington said it was "gravely concerned" by the fighting at Debaltseve and was monitoring reports of a new column of Russian military equipment heading to the area.
The United States has been considering sending weapons to aid Kiev, although the State Department said on Tuesday getting into a proxy war with Russia was not in the interests of Ukraine or the world.
EU foreign policy chief Francesca Mogherini said Tuesday's battles were "not encouraging" but she had not abandoned hope for the ceasefire.
"As long as there is a signed deal to which the parties still refer as something that needs to be implemented, I will not say that there is a failure," she said.
HOPES LOW
Hopes that the deal reached last Thursday would end a conflict that has killed more than 5,000 people were always low after a rebel advance in January ended an earlier truce.
But Western countries appear to have been taken by surprise that the rebels refused even to pay lip service to the ceasefire at Debaltseve, adding to concerns the separatists and Putin want to cement rebel gains before allowing any peace to take hold.
Russia has already annexed Ukraine's Crimea peninsula, and Western countries believe Putin's goal is to establish a "frozen conflict" in eastern Ukraine, gaining permanent leverage over a country of 45 million people seeking integration with Europe.
Military trucks and tanks came and went in the largely destroyed village of Nikishine as the rebels pounded nearby Debaltseve with rockets, heavy artillery and mortar bombs.
"We'll take Debaltseve. It will all be ours. Our homeland will remain our homeland," said a rebel tank operator who gave his name only as Bass, his nom de guerre.
Observers from the OSCE security group, delegated to monitor the ceasefire under last week's agreement, have been kept out of Debaltseve by the rebels.
"A MORAL THING"
A new call for peace by Germany, whose Chancellor Angela Merkel was the driving force behind the peace deal after marathon diplomacy last week, fell on deaf ears.
"We do not have the right (to stop fighting for Debaltseve). It's even a moral thing. It's internal territory," said Denis Pushilin, a senior separatist figure. The goal would be "destroying the enemy's fighting positions".
Ukraine's military reiterated in Kiev that its forces could not pull back their big guns while the rebels were shooting. "In the last 24 hours there has been firing so there is no ceasefire and so there is no precondition for a pull-back of heavy weapons," military spokesman Andriy Lysenko said. Rebel official Pushilin said the separatists would not pull back their guns unless Kiev did.
"We will not do anything unilaterally. That would make our soldiers targets," he told Reuters in Donetsk, the main city in the east and seat of one of two self-proclaimed rebel "people's republics".
The head of the other rebel republic, Luhansk, said some weapons were pulled back there. This could not be independently confirmed.
(Additional reporting by Pavel Polityuk, Natalia Zinets, Alessandra Prentice and Richard Balmforth in Kiev, Polina Devitt in Moscow and Madeline Chambers in Berlin; Writing by Timothy Heritage; Editing by Peter Graff)