Ukrainian and pro-Russian forces flexed their military muscles in the restive east of the country on Wednesday, a day ahead of high-level international talks on the escalating crisis.

A concerned NATO said it planned to deploy more forces in eastern Europe and called for Russia to stop "destabilising" the former Soviet satellite, which has been in deep turmoil since the ouster of the pro-Kremlin leadership in February.

Russian President Vladimir Putin has warned that Kiev's decision to send in troops this week to put down a separatist uprising in its industrial heartland had dragged the country to the brink of civil war.

An AFP reporter in the flashpoint town of Slavyansk saw at least six APCs and light tanks, some flying Russian flags, in the city centre with dozens of armed men in camouflage stationed around them claiming to be volunteers and Ukrainian army defectors.

Ukraine's defence ministry confirmed the vehicles were seized from its forces after they were blocked by local pro-Russian activists.

An AFP reporter in the nearby town of Kramatorsk said a column of 14 armoured vehicles still controlled by the Ukrainian army was deployed, although these were too were being blocked by a crowd of pro-Moscow protesters.

Military jets could be seen flying low over both towns in an additional show of strength.

As the situation on the ground appeared to escalate, NATo chief Anders Fogh Rasmussen announced that the alliance would deploy additional forces in eastern Europe but said a political soluition was the only way forward.

"We will have more planes in the air, more ships on the water... and more readiness on the land," he said.

The authorities in Kiev also ratcheted up verbal attacks on Russia, with Prime Minister Arseniy Yatsenyuk accusing Moscow of trying to build "a new Berlin wall".

Yatsenyuk demanded Moscow halt its alleged support for the separatists but said Kiev remained committed to Thursday's crunch talks between the top diplomats of Russia, the European Union, the United States and Ukraine.

"There is only one directive for the Ukrainian foreign ministry -- the Russian government has to immediately withdraw its commando groups, condemn the terrorists and demand they leave the installations," he said.

Ukraine's acting Defence Minister Mykhailo Koval headed out to the east to check on the progress of Kiev's seemingly stalled bid to oust the separatists.

The military also pledged a firm response after two serviceman were allegedly taken hostage by pro-Russian forces in the Lugansk region.

The Ukrainian Security Service (SBU) said in a statement that Russian commanders in the east had issued pro-Kremlin militants with "shoot-to-kill" orders.

Vitaliy Naida, a spokesman for the service's counter intelligence department, said some 40 Russian spys had been uncovered and stopped since the operation in the east started.

Elsewhere, pro-Moscow gunmen stormed the mayor's office in the regional capital Donetsk, according to an AFP reporter.

- 'Sharp escalation' -

On Tuesday, authorities in Kiev launched what they called an "anti-terrorist operation", sending tanks towards Slavyansk -- which remains effectively under the control of pro-Russian gunmen -- in a high-risk strategy sharply condemned by the Kremlin but supported in Washington.

The 20 tanks and APCs sent to Slavyansk were the most forceful response yet by the Western-backed government to the pro-Kremlin militants' occupation of state buildings in nearly 10 cities across Ukraine's rust belt.

But the move drew a sharp response from Putin in a telephone conversation with German Chancellor Angela Merkel.

"The Russian president remarked that the sharp escalation of the conflict has placed the country, in effect, on the verge of civil war," the Kremlin said in a statement.

But both Putin and Merkel "emphasised the importance" of Thursday's talks.

The Kremlin described the actions of the Ukrainian army as an "anti-constitutional course to use force against peaceful protest actions" and called on UN chief Ban Ki-moon to condemn the action.

Ban in turn "expressed his alarm about the highly volatile situation in eastern Ukraine" and told Putin that everyone needed to "work to de-escalate the situation".

But the White House described Ukraine's military operation as a "measured" response to a lawless insurgency that had put the government in an "untenable" situation.

Washington also said it was coordinating with its European allies to slap more sanctions on Russia.

"Our national security team is in active discussions about the next round of sanctions," State Department spokeswoman Jen Psaki told reporters, but said new measures were unlikely before the Geneva talks.

- 'Threat of counterstrike' -

Kiev's untested interim leaders -- who took power in February after four months of pro-European protests ousted Kremlin-backed president Viktor Yanukovych -- have struggled to meet the high-stakes challenge presented by the coordinated raids that began in the industrial hubs of Donetsk and Lugansk and have since spread to nearby coal mining towns and villages.

The breakaway move could potentially see the vast nation of 46 million people break up along its historic Russian-Ukrainian cultural divide.

Moscow last month annexed the largely Russified region of Crimea after deploying military forces there and backing a hasty local referendum calling for the Black Sea peninsula to be absorbed into the Russian Federation.

Ukrainian intelligence said Wednesday it had intercepted communications showing that the same Russian agents who oversaw the seizure of Crimea were now coordinating the unrest in the east.

Moscow has repeatedly claimed it has no ties to the Russian-speaking gunmen who have proclaimed the creation of their own independent republic and asked Putin to send in the 40,000 troops now massed along Russia's border with Ukraine.

But a forceful military response by Kiev could prompt a devastating counterstrike by Russian troops who are waiting to act on Putin's vow to "protect" Russian-speakers in the neighbouring state.

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