Russian-backed rebels advanced to encircle a Ukrainian army garrison town in a new offensive that has again unleashed all-out war after a five-month ceasefire and brought threats of new Western sanctions against Moscow.

The United States and the European Union are considering new measures after accusing Russia of openly supporting the latest rebel advance with money, arms and troops on the ground.

Ambassadors of NATO countries and Ukraine met in Brussels on Monday to discuss a response to the fighting, their first such emergency meeting since August.

Moscow denies playing a military role. Russian president Vladimir Putin accused Kiev of prolonging the conflict by refusing to talk to the rebels.

In a provocative new charge, Mr Putin also said a "foreign NATO legion" was fighting alongside Ukrainian forces.

"There are official divisions of the armed forces but to a great extent there are so-called voluntary nationalist battalions. This is not even an army, it's a foreign legion. In this case it's a foreign NATO legion," Mr Putin said.

NATO secretary-general Jens Stoltenberg dismissed the accusation as "nonsense".

"There is no NATO legion," he said. "The foreign forces in Ukraine are Russian."

The government in Kiev ordered a state of emergency across the two rebel-dominated provinces and placed all Ukrainian territory on high alert.

Its military said seven Ukrainian soldiers had been killed and 24 wounded in intensified clashes in the past 24 hours, with heavy fighting at Debaltseve, a small town the rebels have vowed to encircle to safeguard their main strongholds.

Violence in eastern Ukraine is at by far its worst since a ceasefire was agreed last September. Casualties have mounted, including in the big government-held port of Mariupol where Kiev says 30 civilians were killed in rebel shelling on Saturday.

After months during which the truce was punctured by small-scale skirmishes on the front line, rebels fighting for territory the Kremlin calls "New Russia" said last week they were left with no choice but to launch an advance.

Their main aim, they said, was to push back government forces that had been shelling rebel-held cities.

The Kiev government sees the rebel advance as a repudiation of the ceasefire, restarting a war in which 5,000 people have been killed.

Kiev and NATO said thousands of Russian troops were in eastern Ukraine fighting on the rebels' behalf with advanced weapons, despite Moscow's denials.

"Rebels are constantly attacking Ukrainian government positions across the conflict zone with artillery, mortars, grenade launchers, tanks," Kiev military spokesman Volodymyr Polyovy said at a televised briefing.

The rebels are targeting Debaltseve, a town with a population of around 26,000 that straddles the main road and train line between the two principal rebel strongholds, Donetsk and Luhansk.

They said the government garrison there allowed Kiev's guns to menace civilian areas.

"Look on the map. There is a so-called 'Debaltseve tongue'," separatist deputy commander Eduard Basurin said, referring to a kink in the frontline where the government holds the town.

The rebel goal was "to push [government forces] further back from us, from settlements, and straighten the [front] line," he said.

He denied that the rebels had launched any assault on Mariupol, the port of 500,000 people which is by far the biggest government-held city in the two rebel-dominated provinces.

"We have no offensive there. On the city itself - absolutely none."

EU calls emergency meeting as Ukriane conflict flares up

The military has reported civilian casualties at Debaltseve without giving any figures.

After months during which European politicians discussed whether to start easing sanctions on Russia, the return of fighting has suddenly shifted the debate to how to tighten them.

Sanctions and the falling oil price have caused serious economic damage to Russia, with the rouble currency tumbling over the course of the past two months.

The European Union has summoned foreign ministers of its 28 member states to an emergency meeting on Thursday.

US president Barack Obama said Washington was considering all options short of military action to respond to "the aggression that these separatists - with Russian backing, Russian equipment, Russian financing, Russian training and Russian troops - are conducting".

Germany's foreign minister Frank-Walter Steinmeier hinted at further sanctions, saying an assault on government-held Mariupol would demand a European response.

Moscow maintains Kiev is to blame for the latest fighting for refusing to pull its heavy weapons from the front and negotiate directly with the rebels.

Reuters