Pro-Russian rebels shot down two Ukrainian helicopters on Friday, killing two crew, as troops tightened their siege of separatist-held Slovyansk in what Moscow called a "criminal" assault by Kiev that wrecked hopes of peace.
President Vladimir Putin's spokesman said the Kremlin was "extremely worried" that it had not heard from an envoy Putin had sent to the eastern city to help free foreign hostages. He said the "punitive operation" mounted by Ukrainian forces had destroyed a peace plan agreed with Western powers two weeks ago.
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The United Nations Security Council is holding an emergency meeting. This is the security council's 13th meeting on Ukraine since the start of the crisis.
U.S. major averages slipped into negative territory as geopolitical worries took center stage, erasing earlier gains following the better-than-expected jobs reports.
The Ukrainian Defence Ministry said in a statement that two Mi-24 helicopter gunships were shot down by shoulder-launched anti-aircraft missiles while on patrol overnight around Slovyansk, a city that rebels have turned into a heavily-fortified stronghold. Two airmen were killed and others wounded. The attack helicopter normally has two crew but can carry more.
Other Ukrainian officials and the separatist leader in Slovyansk had said earlier that one airman was taken prisoner.
A third helicopter, an Mi-8 transport aircraft, was also hit and a serviceman wounded, the Defence Ministry said. The SBU security service said this helicopter was carrying medics.
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Eight hours after Reuters journalists in Slovyansk heard shooting break out and saw one helicopter opening fire, the city of 130,000 was quiet, with shops shut and armed separatists in control of the streets while Ukrainian forces in armored vehicles had taken up positions on the outskirts of town.
Ukrainian officials said troops overran rebel checkpoints around the city in an operation launched before dawn and it was now "tightly encircled". They pointed to the heavy fire that hit the helicopters as proof of the presence of Russian forces, despite repeated denials from Moscow that it has troops on the ground or is controlling the uprising.
Putin's spokesman heaped blame on the Ukrainian government, which took power two months ago after pro-Western protests forced the Kremlin-backed elected president to flee to Russia.
Noting that Putin had warned before that any "punitive operation" would be a "criminal act", Dmitry Peskov told Russian news agencies that this was what had now happened at Slovyansk, where separatists seeking independence or annexation by Moscow are holding seven foreign European military observers.
Saying Putin had sent an envoy, Vladimir Lukin, to southeast Ukraine to negotiate their release, Peskov said that Lukin had not been heard from since the Ukrainian operation began.
"While Russia is making efforts to de-escalate and settle the conflict, the Kiev regime has turned to firing on civilian towns with military aircraft and has begun a punitive operation, effectively destroying the last hope of survival for the Geneva accord," he said, referring to a deal on April 17 signed by Russia, Ukraine, the United States and the European Union.
Under that agreement, separatists were supposed to lay down their arms and vacate the public buildings they have seized in about a dozen towns they have seized across the Russian-speaking east. Since then, however, they have tightened their grip.
Gunmen in Slovyansk said they were holding their ground against Ukrainian forces that have struggled to assert control over the past month. Some threw up new barricades of felled trees. And dozens of civilians blocked a road against a unit of Ukrainian armored vehicles, telling troops to go home.
Reuters journalists in the city heard shooting from shortly after 4 a.m. (0100 GMT) and saw a military helicopter open fire. Towards midday, the city was quiet, shops were shut but rebel gunmen appeared to be still in tight control of the streets. Ukrainian troops were at a halt in the suburbs.
The SBU said the deadly use by the separatists of shoulder-launched anti-aircraft missiles was evidence that "trained, highly qualified foreign military specialists" were operating in the area "and not local civilians, as the Russian government says, armed only with guns taken from hunting stores".
Russia denies involvement but has massed troops on the border and threatened to intervene to protect the Russian-speaking majority in eastern Ukraine from what it calls an illegitimate, Western-backed government in Kiev. Alarmed Western powers believe President Vladimir Putin is set on asserting Moscow's influence over its former Soviet neighbors.
Armed groups seeking union with Russia have seized a number of government buildings in towns in eastern Ukraine. The action in Slovyansk appeared to mark the heaviest military response by Kiev since it tightened a cordon around the city a week ago.
"They wanted to carry out some small-scale tactical operations just to scare the people," said a militant manning a checkpoint leading to the army-held airfield. "But so far things have not worked out the way they wanted."
On his Facebook page, Interior Minister Arsen Avakov posted: "The goal of our anti-terrorist operation and, at the same time, our demands to the terrorists are simple:
"Free the hostages, lay down weapons, vacate administrative buildings and get municipal infrastructure back to normal."
He added: "We are ready to negotiate with the protesters and their representatives. But terrorists and armed separatists (will get) only inevitable retribution."
He urged local people to stay indoors and said Ukrainian forces, from the Interior Ministry, National Guard and the armed forces, had orders not to fire on residential buildings.
Support for the separatist movement is patchier in eastern Ukraine than it was among the majority ethnic Russian population of Crimea, which Moscow seized and annexed in March. However, many are fearful of the new authorities in Kiev and have little faith in Ukraine after 23 years of post-Soviet independence marked by rampant corruption and poor living standards.
"Shells came into my garden," said one local man, Gennady. "They say that they have come to defend us. But who from?" he said of the Ukrainian forces. "Civilians must stop them."
On the town's southern outskirts, eight Ukrainian armored personnel carriers cut off the road but faced a cordon two deep of local residents shouting at them to go home.
The clashes around Slovyansk came only hours after Russia staged a huge May Day parade on Moscow's Red Square on Thursday - its first since the Soviet era - with workers holding banners proclaiming support for Putin after the seizure of territory from neighboring Ukraine.
On Wednesday, Ukraine's leaders - who came to power in February when the previous Moscow-backed president was toppled after months of protests - conceded they were "helpless" to counter the fall of government buildings and police stations in the Donbass coal and steel belt. Donbass is the source of up to a third of Ukraine's industrial output.
Separatists had also stormed the prosecutor's office in the city of Donetsk on Thursday, throwing rocks, firecrackers and teargas at riot police defending officials they accused of working for the Western-backed government in Kiev.
Rebels in the city, capital of a province of 4.3 million, have declared a "People's Republic of Donetsk" and called a referendum on secession for May 11, undercutting a planned presidential election in Ukraine two weeks later.
Having seized buildings in the capital of the easternmost province, Luhansk, on Tuesday, gunmen took control at dawn on Wednesday in the nearby towns of Horlivka and Alchevsk.
The International Monetary Fund warned that if Ukraine lost territory in the east it would have to redesign a $17 billion bailout of the country, probably requiring additional financing.
Citing the situation in the east, acting Ukrainian President Oleksander Turchinov has signed a decree reinstating compulsory military service for men aged between 18 and 25.
The Kiev government, along with its Western allies, accuses Moscow of orchestrating the uprising. The United States and European Union have imposed sanctions in response to Russia's annexation of Crimea and involvement in eastern Ukraine.
The intervention in Ukraine has been enormously popular in Russia. One opinion poll on Wednesday showed 82 percent support for Putin, his highest rating since 2010.