Even as President Petro Poroshenko and his team prepared to unveil their blueprint for ending more than two months of rebellion, government forces, using artillery and heavy armour, said they were tightening the noose on separatists near Krasny Liman, north of Donetsk.
Government forces said the fighting erupted early yesterday after rebels refused to lay down their arms as part of Mr Poroshenko's peace plan.
Accounts from both the Ukrainian government and the rebels suggested a major battle involving armoured vehicles, including tanks.
One military source said 4,000 separatists were involved in the fighting.
Rebel sources in Donetsk said Ukrainian infantry, supported by 20 tanks and many other armoured vehicles, were storming the village of Yampil, about seven miles east of Krasny Liman.
Rebel commander Igor Strelkov reported heavy losses in equipment and arms among the pro-Russia separatists, who were faced with a huge superiority in heavy armour on the government side.
He urged Moscow to "take some measures".
From the nearby town of Siversk, artillery blasts, small arms fire and machinegun fire could be heard from more than a mile away. From high ground, smoke could be seen billowing from rebel positions under attack.
Mr Poroshenko is pushing a peace plan to end the rebellion, which he said would be unveiled soon and presented to EU ministers early next week.
It includes an offer of a unilateral ceasefire by government forces and amnesty for the separatists - but only if they lay down their weapons.
Kiev has accused Russia of fomenting the unrest and allowing volunteer fighters from Russia to cross into Ukraine, a claim denied by Moscow.