Vladimir Putin has warned there will be “consequences” if Ukraine has used its army against pro-Russian activists.
Ukraine’s interior ministry said “up to five terrorists” have been killed in clashes during an operation to clear three checkpoints in the eastern town of Slavyansk.
The Russian President responded: “If Kiev really began to use the army against the country’s population… that is a very serious crime against its own people.
“That is simply a punitive measure that will without question have consequences… including for our inter-governmental relations.”
There were reports of at least 10 Ukrainian armoured vehicles just north of Slavyansk, while two helicopters were seen circling the area.
There remains a heavy rebel presence in the city.
One activist, Stella Khorosheva, told The Associated Press: “We will defend ourselves to our lastdrop of blood. We are ready to repeat Stalingrad.”
Reuters is reporting Ukrainian forces have withdrawn from the city, which is 160 kilometres (100 miles) west of the Russian border.
Ukraine announced on Wednesday it was re-launching a campaign against pro-Russia insurgents occupying government buildings.
The country’s military liberated a town hall in eastern Mariupol without any casualties, according to interior minister Arsen Avakov on Facebook.
He also claimed 70 people led by Russian soldiers raided a Ukrainian base at Artemivsk, wounding one soldier.
With tensions rising, all sides have ramped up their rhetoric.
Russia’s Foreign Minister, Sergei Lavrov, accused the West of instigating a “revolution” in Ukraine, culminating in the ousting of pro-Kremlin president Viktor Yanukovych, as part of a “geopolitical game” against Moscow.
“Our Western partners, first and foremost the United States, tried to behave as winners in the Cold War and pretend that one can ignore Russia in European affairs,” the Interfax news agency quoted Mr Lavrov as saying.
Meanwhile, US President Barack Obama accused the Kremlin of not honouring an agreement aimed at defusing the Ukraine crisis.
The Geneva accord between Russia, Ukraine, the US and EU called for an end to violence in eastern Ukraine and compelled armed groups to surrender weapons and leave official buildings.
Mr Obama has said further sanctions were “teed up”.
“We continue to see malicious, armed men taking over buildings, harassing folks who are disagreeing with them, destabilising the region, and we haven’t seen Russia step out and discourage it,” said Mr Obama.
The West has already issued asset freezes and visa bans targeting Russian officials but has ruled out military action.
Mr Putin admitted sanctions were hurting Russia – but claimed the West would also suffer.
“Overall they are causing (damage), because ratings are being reviewed, loans could become more expensive and so forth. But this is of no critical character,” he said.
“They are harmful for everyone, they destroy the global economy and are dishonourable on the part of those who use those types of tools.”
To add to the tensions, Russia’s Gazprom has sent an $11.4bn (£6.7bn) gas bill to Ukraine energy firm Naftogaz – five times the original amount.