Ukrainian President Petro Poroshenko's office said an agreement had been reached with Russia's Vladimir Putin on a "permanent cease-fire" in eastern Ukraine on Wednesday, but toned down the statement after Russia denied the deal.
"The conversation resulted in an agreement on constant cease-fire in the Donbass. The parties reached mutual understanding on the steps that will facilitate the establishment of peace," the initial statement said. Russian shares rallied on the news and gold hit a 2-1/2 month low.
However, a spokesman for Putin denied a cease-fire had been reached in comments made to RIA news agency, arguing that Russia was not a party to the Ukraine conflict. The German DAX and broader FTSEurofirst 300 trimmed some of their gains and German Bund futures cut their losses following the comments.
Ukraine then altered its statement to drop "constant" or permanent from the wording and said the parties had reached mutual understanding on the "steps that will facilitate the establishment of peace".
U.S. President Barack Obama said it was too early to tell what the reports of a ceasefire meant. Speaking at a press conference in Estonia, he said the U.S. preference was for a "strong, cooperative Russia".
Pro-Russian separatists have been battling Kiev's forces in the mainly Russian-speaking Donbass region, which is home to most of Ukraine's heavy industry and accounts for about 18 percent of the country's economic output.
News of the cease-fire comes ahead of a press conference in Estonia later Wednesday with U.S. President Barack Obama and follows reports that the European Union was expected to decide new sanctions on Russia by the end of the week.
Members of the NATO military organization are meeting in Wales, U.K., Thursday, to discuss the latest developments in Ukraine.
The EU had planned to expand defense sanctions to include service contracts, the reports by Dow Jones and Reuters said on Tuesday.
Ukraine's acting U.K. ambassador, Andrii Kuzmenko, told CNBC on Wednesday that the country wanted to restore its territorial integrity and was therefore seeking military, technical and financial assistance as well as tougher sanctions against Russia.
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"We definitely need something more strong which should be a means of protection," he said, mentioning air defense specifically. "We do feel very strong diplomatic, political support from the Western countries, from the European Union."