Russia's punitive campaign in the Caucasus threatened to intensify into all-out war against Georgia last night, with Russian troops seizing control of strategic towns a couple of hours from the capital, and aircraft pounding Georgian infrastructure.

Vastly outnumbered by the Kremlin's ground and air forces, the Georgian government announced it was pulling back its troops to defend the capital, Tbilisi, against a feared Russian onslaught. Washington accused the Kremlin of long preparing an invasion of Georgia in "aggression that must not go unanswered".

"Russia has invaded a sovereign neighbouring state and threatens a democratic government elected by its people. Such an action is unacceptable in the 21st century," President George Bush said. "The Russian government must reverse the course that it appears to be on." He urged Russia to agree to a ceasefire offer by Georgia.

The Georgian authorities said the town of Gori, 40 miles north of Tbilisi, had, in effect, fallen to the Russians, who were also advancing from the breakaway province of Abkhazia in the west into territory previously under Georgian control.

"The Georgian army is retreating to defend the capital. The government is urgently seeking international intervention to prevent the fall of Georgia and further loss of life," said the Georgian government. Its president, Mikhail Saakashvili, said the Russian campaign was aimed at overthrowing his government.

The Georgian embassy in London last night accused Russia of attempting to "conquer" Georgia. "Today the statehood of Georgia is in great danger and thereby leaving existing world order in uncertainty."

Giorgi Badridze, acting head of the embassy, compared Russia's actions with Nazi incursions into Europe in the run-up to the second world war.

Alexander Lomaia of Georgia's National Security Council said: "Russia seems intent on overthrowing the democratically elected government of Georgia and occupying the country."

The Kremlin spurned a chorus of western calls for a ceasefire, already accepted by Saakashvili, and appeared determined to ram home its military advantage at the risk of sparking an international crisis. Moscow seemed intent on imposing humiliating truce terms on Georgia.

Russian prime minister Vladimir Putin, taking a leading role in the crisis, attacked Washington for helping Georgia fly home troops from Iraq and said the west was mistaking the aggressors for victims. "The cold war has long ended but the mentality of the cold war has stayed firmly in the minds of several US diplomats. It is a real shame," Putin said.

France's president, Nicolas Sarkozy, is to try to mediate in Moscow today before meeting Saakashvili in the Georgian capital, while Chancellor Angela Merkel of Germany is to meet Russia's president, Dmitri Medvedev, in Sochi, just outside Georgia on the Black Sea, on Friday.

The US vice-president, Dick Cheney, said: "Russian aggression must not go unanswered and its continuation would have serious consequences for its relations with the United States."

Military officials in Moscow insisted yesterday that Russian forces would not move beyond the contested region of South Ossetia on Georgia's northern border with Russia. Sergei Ivanov, the deputy prime minister, insisted Russian "peacekeepers" were contained in South Ossetia and Abkhazia. The Russian defence ministry said: "There are no Russian troops in Gori."

But by last night sources in Moscow and Tbilisi and observers on the ground confirmed that Russian troops had advanced tens of miles into Georgian-held territory from Abkhazia.

Russian troops and armoured vehicles were in control of a Georgian military base at Senaki, 25 miles beyond the Abkhaz boundary, UN military observers confirmed. The Russians had also seized Georgian police stations in Zugdidi after delivering an ultimatum to the Georgians to surrender their weapons near the Abkhaz frontlines. The towns of Kutaisi and Kurga were said to have been seized.

Georgian officials claimed that Russian tanks seized Gori, smashing the Georgian lines in two places to take control of the town that straddles the road connecting the eastern and western parts of Georgia.

Saba Tsitsikashvili, a local journalist in Gori, said Russian troops had occupied the main road on the edge of the city, but had not moved towards the centre. "People are in panic. This road where the troops are is about 2km from the centre," she said.

"This is a full-scale invasion." said Irakli Batkuashvili, head of Georgia's military planning division. "This is an occupation... Half of Georgia is under Russian control. Our aim now is to build up our troops and to create a defensive line in front of Tbilisi."