European military observers deny they are Nato spies while captors insist they are 'not our hostages – they are our guests'

Eight European military observers kidnapped by pro-Russian gunmen in eastern Ukraine have been shown off at a press conference in the rebel-held city of Slavyansk.

The group, looking tired but unharmed, appeared next to Slavyansk's self-appointed separatist "mayor", Vyacheslav Ponomarev. They include four Germans, a Pole, a Dane, a Swede and a Czech officer. The rebels did not exhibit five members of Ukraine's armed forces captured at the same time on Friday.

Speaking in German, the senior officer, Colonel Axel Schneider, defended his mission to the region, under the auspices of the Organisation for Security and Co-operation in Europe (OSCE). He said claims by Ponomarev that the group were Nato spies were blatantly false. "We are not Nato," he said. "Our mission was transparent. All OSCE members including Russia knew about it."

Meanwhile, in Donetsk pro-Russian separatists seized control of regional state television offices. Masked men with truncheons and shields were seen at the entrance to the building as a crowd of about 400 people surrounded it, while police stood nearby but did not intervene. One of the separatists told Reuters they had seized the TV building because "they try to influence the people and they broadcast misinformation".

In Slavyansk, Schneider said his team had acted within diplomatic protocols. He said they had not attempted to enter the town but were instead a few miles south of it, heading back towards Donetsk, when armed gunmen intercepted their mini-van. He said they had been looking for tanks and artillery at the time but had not found any.

The rebels have described the kidnapped Europeans as "prisoners of war" and have said they might be bartered for imprisoned pro-Russian activists in Kiev. Schneider said he had no idea what the method for a prisoner-swap might be, adding: "We are completely in the hands of Mayor Ponomarev."

Masked gunmen escorted the EU nationals into the room in Slavyansk's town hall. Schneider said they had not been ill-treated, but said: "I cannot go home of my free will."

Earlier, Ponomaryov, who was wearing a pistol in a holster and was escorted by two armed bodyguards, told reporters that the OSCE observers "are not our hostages – they are our guests".

Schneider said they had initially been housed in a basement but were transferred on Saturday to a comfortable room with light and air-conditioning. He said they had agreed to take part in a press conference at Ponomarev's suggestion "so our families might see us".

The account of the kidnapping raises questions as to whether the rebels were tipped off about the group's movements in advance. The road between Slavyansk and Kramatorsk, nine miles (15km) to the south, is usually safe, with traffic flowing regularly in both directions. The one rebel check point on the outskirts of Kramatorsk is low-key. The military observers were carrying ID but were not wearing uniforms and were unarmed.

Schnedier denied rebel claims he had come to the area with spying equipment and said: "We just had small cameras with us." The mayor could use the group to get his message out, he added. Ponomarev, however, said he would not release the kidnapped military observers despite negotiations between the separatists and the Vienna-based OSCE. "We are in a war situation," he said.

The pro-Russian militia is also holding Ukrainian journalists, local residents and the town's elected mayor, who has been allowed visits from her family and hairdresser. Another Ukrainian reporter, Lviv-based Yury Lelyavsky, was seized on Friday. The EU nationals appear to be high-value bargaining chips as the west prepares for further confrontation with Moscow.

The G7 is expected to announce on Monday an expansion of the list of Russian individuals and companies subject to sanctions. They will include close friends of Vladimir Putin as well as those allegedly involved in co-ordinating unrest across Ukraine. The US and EU accuse Moscow of failing to implement a deal agreed in Geneva under which illegal groups would end takeovers of official buildings and give up their weapons.

The British foreign secretary, William Hague, said that while diplomatic routes to de-escalate the crisis remained open, Europe and the US were also working on more far-reaching measures of economic, trade and financial sanctions in case Russia did not back down.

"Those are for the future. What we will hear about in the coming days, what we will agree … is an expansion of existing sanctions, measures against individuals or entities in Russia," Hague told Sky News.

He said Britain and its allies would be willing to accept the potential costs to their own countries of implementing further reaching economic or trade sanctions.

"It would be a price worth paying if this situation continues to deteriorate," Hague said. "We will calculate them in way that has the maximum effect on the Russian economy and the minimum effect on our own economy and the European Union's."

He added that international observers being held by pro-Russian separatists should be released "immediately and unconditionally" and called on Russia to assist by lobbying the rebel groups.

On Saturday, a standoff continued between armed pro-Russian militias in Slavyansk and the Ukrainian army down the road. Ukraine's national guard established a checkpoint 13 miles to the north of the rebel city, on the main road to Kharkiv. "I love my country. I'm defending it against the fascists over there," said 23-year-old soldier Andrei, gesturing towards Slavyansk.

Officers made clear they had no orders to storm Slavyansk. Instead they said their role was to prevent weapons reaching the self-proclaimed "Donetsk People's Republic".

Andrei said he had arrived at the checkpoint that morning. "We are going to win," he said cheerfully. "We're stronger." Another soldier, lying under a blossoming tree, added: "We're going to win because we believe in God. He's on our side."

Despite the threat of war, the situation in Slavyansk was remarkably calm. Traffic, including scheduled buses, flowed in and out of town, waved through tyre checkpoints by militia volunteers. One militia checkpoint proclaimed "Stop Nato" and "Love, family and peace".

"The government in Kiev doesn't want to listen to us," said Volodya, a 49-year-old electrician. "They say they're the good guys and that we are bad guys and separatists." He added that when he went to school in the Soviet Union in the 1980s he learned that Stepan Bandera – the Ukrainian nationalist leader during the second world war and venerated by the west of the country – was a fascist. He called Ponomarev a "hero on the barricades".