Kiev said on Wednesday it would halt payment of state funds in areas controlled by pro-Moscow rebels, as both sides hardened positions in what is rapidly becoming a "frozen conflict": a long-term stalemate that the West believes is Russia's aim.
A day after the rebels held inauguration ceremonies for their leaders, the separatists and the central government each accused each other of violating a September peace deal and signaled they would withdraw support for some of its terms.
The past four days have seen the rebels stage elections for leadership which the government called illegal, and the government respond by saying it would revoke a law that would have granted eastern regions autonomy and sent them cash.
Despite a ceasefire declared two months ago, two teenagers were killed by shelling in Donetsk, one of the two separatist strongholds, on Wednesday as they played football on a school sports field, the city's administration said.
The rebels say their newly elected leaders must be allowed to negotiate with Kiev directly; Kiev says this is impossible. Both sides' positions reverse parts of the 12-point peace plan, the Minsk protocol, agreed in Belarus in September.
With Kiev lacking the military might to break the rebels by force, Western allies now fear that a large chunk of Ukrainian territory will become a Russian protectorate with a parlous economic future, beyond the writ of the central government.
"We have now realistically entered the phase of a 'frozen conflict'," said Yury Yakimenko, a political analyst at Ukraine's Razumkov political research center, using a term often applied to other ex-Soviet republics where separatist enclaves have been protected by Russian troops since the early 1990s.
The American general who serves as the highest ranking NATO officer also said this week that the conditions for a frozen conflict were being created in Ukraine.