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Russian defense ministry denies any incursion into Ukraine, says no vehicles destroyed

Ukrainian artillery destroyed a "significant" part of a Russian armored column that crossed into Ukraine during the night, President Petro Poroshenko told British Prime Minister David Cameron on Friday, according to Ukraine's presidential website.

Separately, a Ukrainian military spokesman said Ukrainian forces had tracked the Russian armored column as soon as it crossed onto Ukrainian soil. The announcement rattled global markets.

"Appropriate actions were undertaken and a part of it no longer exists," military spokesman Andriy Lysenko told journalists.

Read MoreStocks drop on fresh reports of Russia, Ukraine conflict

Poroshenko's website said he and Cameron had discussed the situation by telephone following British news reports that a Russian armored column had entered Ukrainian territory.

"The president said that this information was reliable and confirmed because a significant part of this equipment had been destroyed in the night by Ukrainian artillery," it said.

Lysenko said the situation in the conflict zone was becoming increasingly tense, with Ukrainian forces, who are fighting pro-Russian separatists, also coming under artillery attack from Russian territory.

Russia, meanwhile, denied that any military vehicles had even entered Ukrainian territory, and accused Ukraine of attempting to disrupt its humanitarian aid mission to eastern Ukraine and called for a ceasefire in the region to allow for the deliveries. The Kremlin has continuously denied sending weapons and troops into Ukraine.

"We draw attention to the sharp intensification of military action by Ukrainian forces with the apparent aim to stop the path, agreed on with Kiev, of a humanitarian convoy across the Russia-Ukraine border," the Foreign Ministry said in a statement.

Ukraine accused that humanitarian convoy of attempting to ferry Russian military personnel on Friday, but Russian Defense Minister Sergei Shoigu told the U.S. that none were present with the aid, the Pentagon said. U.S. Defense Secretary Chuck Hagel had sought clarification about the Russian convoy from the defense minister during a phone call on Friday and was "guaranteed" it did not include Russian military personnel and would not be used as a pretext for intervening in Ukraine, the Pentagon said in a statement.

Russian news wires reported on Friday that Russian Gen. Maj. Igor Konashenkov said no Russian military convoy has crossed the border despite Ukraine's claims. NATO reported the Russian incursion.

Read More Russian aid convoy checked; NATO spots 'incursion' into Ukraine

It is unclear whether the fighting is focused on an armored vehicle convoy or the aid shipments.

Ukrainian Foreign Minister Pavlo Klimkin said he will meet with his Russian counterpart, Sergey Lavrov, along with foreign ministers from Germany and France in Berlin on Sunday. The Kremlin said the Ukrainian and Russian chiefs of presidential staff met in Russia on Friday.

Still, the reports of a rebuffed incursion may spark further escalation.

"What has happened, obviously, is some Russian military in uniform have been killed. Whether that begins to produce an escalation—if that is what Mr. Putin is looking for, he could possibly use this an excuse," Thomas Pickering, former U.S. ambassador to Russia, told CNBC. "… it's an open question now whether this will be more support for the Ukrainians and more sanctions for the Russians, which is sort of the obvious next move."

Putin has demonstrated "a penchant for making things worse," Pickering said, adding that "the things that will change that will be an absolutely determined Europe to get itself out of heavy dependency on Russia for oil and gas—and that's not happening."

The European Union's foreign ministers said in a Friday statement that the group would consider "any unilateral military actions on the part of the Russian Federation in Ukraine under any pretext, including humanitarian" as a "blatant violation of international law."

The council urged Russia to "put an immediate stop to any form of border hostilities, in particular to the flow of arms, military advisers, and armed personnel into the conflict region, and to withdraw its forces from the border."

European leaders responded to the reports, with French President Francois Hollande urging Russia to respect Ukraine's territorial integrity, and a Cameron spokesman saying the prime minister is gravely concerned.

Russian military personnel ride atop armoured personnel carriers (APCs) outside Kamensk-Shakhtinsky, Rostov Region, August 15, 2014.
Maxim Shemetov | Reuters
Russian military personnel ride atop armoured personnel carriers (APCs) outside Kamensk-Shakhtinsky, Rostov Region, August 15, 2014.

When news broke of the fighting, U.S. markets immediately turned downward. The CBOE Volatility Index simultaneously spiked, climbing more than 18.6 percent.

Bond yields fell as tensions renewed, with the U.S. 10-year yield reaching its lowest level since June 19, 2013. Gold prices also dropped on the news.

Oil, meanwhile, surged on the news: Both Brent and U.S. crude futures jumped more than $1 a barrel.

The ruble also sold off, as the U.S. dollar and the euro hit session highs against the Russian currency.

Read MoreYields hit lows on renewed Russia, Ukraine conflict

European stocks also fell on the news, with the FTSEurofirst 300 falling 0.3 percent at 1,325.40 points, well below an earlier high of 1,340.88.

Investors have been concerned about the potential fallout to any escalation between the two countries, though recent signs of easing tensions had lifted equities throughout the week.

"If the reports are true that there is an exchange of arms between Russia and Ukraine, that is a setback in the recent calm. It is hard to know how serious this is, but any sustained upturn in violence could lead to a short-term setback," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Asset Management.

Russia and Ukraine have been at odds for months, but renewed international attention was paid to the conflict after a Malaysia Airlines plane was shot down over Ukrainian territory in July, killing 298 people from all over the world.

This story is developing. Please check back for further updates.

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—By Reuters with CNBC