Armed pro-Russian separatists in the eastern Ukrainian city of Slovyansk seized a bus carrying international observers from the Organization for Security and Cooperation in Europe on Friday, Ukraine's Interior Ministry said.

"They are with us in Slovyansk," the de facto mayor of the city, Vyacheslav Ponomaryov, told Reuters in front of the seized security service building where, according to the Ukrainian government, the observers were being held.

"What the situation was I do not know," he said. "It was reported to me that among them [the observers] was an employee of Kyiv's secret military staff.

"People who come here as observers bringing with them a real spy: it's not appropriate."

Later, a man in a mask and camouflage fatigues said there would be no more comments on Friday evening.

The detention of the observers, who are working for the Vienna-based Organization for Security and Cooperation in Europe (OSCE), will heighten Western concerns about lawlessness and arbitrary rule in separatist-held parts of eastern Ukraine.

The group comprised three German soldiers, a German translator, and military observers from Czech Republic, Poland, Sweden and Denmark, a spokesman for the German foreign ministry in Berlin said.

The self-styled mayor of Luhansk region Valery Bolotov (left, with microphone) speaks during a rally in front of the seized office of the SBU state security service in Luhansk on April 25. (Vasily Fedosenko/Reuters)

"At the moment, talks are going on with representatives of pro-Russian forces. They have refused to free the hostages, saying they want to speak to 'competent organs' of the Russian Federation," the Ukrainian interior ministry spokesman said.

Swedish Foreign Minister Carl Bildt wrote on his Twitter account: "Extremely concerned with OSCE inspectors being abducted in a Eastern Ukraine. Including one Swede. They must be released immediately."

Slovyansk is the biggest flashpoint in an armed uprising in eastern Ukraine that has widened into the worst stand-off between Russia and the West since the end of the Cold War.

Russia 'starting a third world war'

The United States said on Friday it was prepared to impose further sanctions on Russia over its actions in Ukraine.

Russian Foreign Minister Sergei Lavrov said the militia in Ukraine's east "will be ready" to lay down arms and vacate the buildings only if the protests in Kyiv's central square are cleared. (Denis Balibouse/Reuters)

Moscow denies allegations it is directing the separatists, who have taken control of large parts of eastern Ukraine over the past three weeks.

But the White House said U.S. President Barack Obama and European allies all felt that Russia had escalated tension in the region, where the rebels have refused to leave official buildings they have occupied.

Britain and Germany agreed further sanctions were in order, building on targeted U.S. and European sanctions against Russian and Ukrainian individuals following Russia's annexation of Crimea. But none of the three countries gave any details of what the sanctions might be, or when they might be enacted.

The standoff has already led to heavy capital flight from Russia, prompting credit rating agency Standard & Poor's to cut the country's ratings on Friday. That forced the central bank to raise its key interest rate to reverse a drop in the rouble.

Earlier Friday, Russian Foreign Minister Sergey Lavrov declared Friday that the pro-Russia insurgents in eastern Ukraine will only lay down their arms if the Ukrainian government clears out the Maidan protest camp in Kyiv.

"The West wants — and this is how it all began — to seize control of Ukraine because of their own political ambitions, not in the interests of the Ukrainian people," Lavrov said.

He added the pro-Russia insurgents will disarm and vacate buildings "only if Kyiv authorities get down to implementing the Geneva accords, clear out that shameful Maidan and liberate the buildings that have been illegally seized."

Ukraine's reaction was swift.

"The world has not yet forgotten the Second World War, but Russia is already keen on starting a third world war," acting Prime Minister Arseniy Yatsenyuk retorted.

Geneva deal at issue

At issue is who is adhering to the Geneva deal and what is an illegal occupation. In Geneva, Russia and Ukraine agreed that all illegal groups in Ukraine should be disarmed and all illegally occupied public buildings and spaces should be vacated.

Pro-Russia militia have seized and been occupying government buildings in more than 10 cities in eastern Ukraine.

In the capital of Kyiv, pro-Ukrainian demonstrators continue to operate a tent camp on the city's main square, known as the Maidan, and occupy several buildings nearby, including city hall. Yulia Torhovets, spokeswoman for the Kyiv city government, said Ukrainian nationalists have promised to free city hall by the end of this week.

Ukraine authorities, however, say the Kyiv occupations are at least tacitly legal because authorities have allowed them.

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"Without a doubt, they have all the rights to do this," Viktoriya Syumar, a deputy head of Ukraine's Security and Defence Council, told The Associated Press.

Elsewhere, there were scattered reports of violence Friday. Ukraine's Defence Ministry said a grenade fired from a launcher caused an explosion in a helicopter at an airfield outside the eastern city of Kramatorsk that injured a pilot.

In southern Ukraine, seven people were injured by a blast at a checkpoint set up by local authorities and pro-Ukraine activists outside the Black Sea port of Odesa. Police spokesman Volodymyr Shablienko said unknown men had thrown a grenade at the checkpoint.

Moscow in March took control of Ukraine's Black Sea peninsula of Crimea and annexed it weeks later with the blessing of residents, attracting condemnation of the West as well as sanctions targeting individuals.