Kiev (AFP) - Ukraine troops and pro-Russian rebels were engaged in combat inside the flashpoint town of Debaltseve on Tuesday, both sides said, in a significant blow to a fragile three-day-old ceasefire.

It was the first time fighting has erupted on the streets of Debaltseve, which up until now had witnessed artillery exchanges between thousands of government troops holed up inside and heavily armed rebels encircling the town.

"Battles are going on right now with rebels storming our positions," Ukraine military spokesman Alexander Motuzyanik told AFP.

"Groups of rebel fighters are penetrating into the town itself."

Members of the separatist self-proclaimed Donetsk People's Republic army collect parts of a destroyed Ukrainian army tank in the town of Vuhlehirsk, about 6 miles to the west of Debaltseve, February 16, 2015. REUTERS/Baz Ratner

Deputy regional police chief Ilya Kiva told AFP by phone from the beleaguered town that separatist fighters were using mortars, rocket propelled grenades and automatic rifles.

"There are wounded and killed but we cannot confirm the numbers yet as the battles are still continuing," Kiva said.

An unnamed rebel military official told the separatists' news agency that insurgents controlled the train station and the eastern outskirts but said it was "not a large part of the town".

Russian news agency Interfax quoted an unnamed rebel source as saying the separatists were conducting "mopping up operations".

Journalists and the wounded driver of a car of a Ukrainian TV channel travel near an explosion after shelling not far from Debaltseve February 17, 2015. REUTERS/Gleb Garanich

The street fighting in Debaltseve represents a new stage in the battle for the strategic town after weeks of fierce clashes around the key location.

Violence has continued unabated in the railway junction that links the two rebel centers of Donetsk and Lugansk despite the official start Sunday of a ceasefire hammered out by the leaders of Ukraine, Russia, Germany and France.

Russia and the rebels claim up to 8,000 Ukrainian troops are trapped in the vital transport hub but Kiev has so far officially refused to accept that its forces are surrounded.