Pro-Russian rebels fought their way into an encircled government bastion and were battling street-to-street on Tuesday, all but dashing hopes that a European-brokered peace deal would end months of conflict.
Two days after a truce went into effect, an agreement reached at all-night talks in the Belarussian capital Minsk last week was unravelling rapidly, with both sides refusing to begin pulling back heavy guns on Tuesday as required.
The failed ceasefire has left thousands of Ukrainian troops surrounded, their fate uncertain. The rebels said they had captured hundreds of them and would not let the rest escape unless they surrender. Ukraine said some of its troops had been taken prisoner but denied the number captured was that high.
The Moscow-backed rebels say the ceasefire does not apply at all to the main battle front at the town of Debaltseve, astride a railway hub where they have continued an all-out assault.
The fighting meant both sides spurned a deadline on Tuesday to being withdrawing heavy guns from the frontline. Kiev says it cannot pull guns back as long as the rebels show no sign of halting their advance.
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