Ukrainian troops launched a dawn raid to try to retake the rebel stronghold of Slovyansk on Friday, surrounding the eastern town and sending in military helicopters, one of which was shot down by pro-Russian rebels, killing two servicemen.
Accusing the pro-Moscow separatists of using mercenaries, Interior Minister Arsen Avakov said the offensive was answered with heavy artillery, with the rebels using grenade and portable anti-aircraft missile launchers to bring down the plane.
Kiev has accused Moscow of financing and arming the separatists, who have seized buildings across Ukraine's eastern Donbass coal and steel belt and demand a referendum on independence on May 11 for at least two eastern regions.
Russia denies the charge, describing the separatists as Russian-speakers defending their rights from a possible assault by Kiev's pro-Western leaders.
Describing the offensive as "the active phase of the anti-terrorist operation", Avakov said its goals were simple - "free the hostages, lay down their arms and free administrative buildings, and restore the normal functioning of the town's administration".
"Against Ukraine's special forces, terrorists used heavy artillery, including grenade launchers and portable anti-aircraft missile launchers," he posted on his Facebook page.
Pro-Russian separatists in Slovyansk, the eastern Ukrainian city where the rebels are most firmly in control, described the operation as "large-scale", and said they had taken one pilot prisoner.
The fighting began at 4 a.m. (0100 GMT), officials and local residents said. Ukrainian troops could be in seen in armored personnel carriers in a southern suburb of Slovyansk.
"Shells came into my garden," said local resident Gennady, who declined to give his last name. "They say that they have come to defend us. But who from? Civilians must stop them (the Ukrainian army)."
Ukrainian officials, who have been criticized for being slow to act to stop the rebels, launched an "anti-terrorist" operation in early April but have resisted large-scale measures so far.
The rebels have seized official buildings in major centers and small towns across the Donbass, often with little or no opposition from local police.
Kiev has acknowledged it has little control over some of the police forces in the east, threatening the status of a presidential election due on May 25 which some in Kiev hope will draw a line under what has become a messy transitional period since President Viktor Yanukovich was ousted in February.