UKRAINIAN troops and pro-Russian federalists were locked in fierce fighting in east Ukraine today after rebels rejected a proposed peace plan.

Heavy fighting broke out in the early morning near the town of Krasny Liman, which has been under Kiev’s control since early this month.

Making the nature of the so-called peace deal very clear, government forces spokesman Vladyslav Seleznyov said: “We issued an ultimatum to the terrorists overnight to surrender their weapons … they refused.”

He continued: “Now we are trying to narrow the encirclement. They are trying to break out.”

A military source claimed that up to 4,000 separatist fighters could be involved in the fighting near Krasny Liman and that armoured vehicles, possibly including tanks, were being used by both sides.

“There’s a major battle going on which exceeds in terms of force and scale anything there has been up to now,” the source said.

Asked about the 4,000 estimate, Mr Seleznyov replied: “Then there’ll be 4,000 coffins.”

Kiev’s forces have been gradually tightening their encirclement of rebel positions to the south and east of Krasny Liman including the rebel stronghold of Sloviansk.

President Petro Poroshenko says that he has a peace plan to end the separatist rebellion including a unilateral ceasefire by government forces and amnesty for the separatists as long as they surrender their weapons.

But since his inauguration on June 7, Kiev has steadily accelerated aggressive military action.

The president met regional officials from Donetsk and Lugansk yesterday to explain his plan — though he maintained his refusal to meet separatist representatives.

Meanwhile, Nato secretary-general Anders Fogh Rassmussen claimed Russia had resumed a military buildup near Ukraine and called it a regrettable backward step.

“I can confirm that we now see a new Russian military build-up — at least a few thousand more Russian troops deployed to the Ukrainian border and we see troop manoeuvres in the neighbourhood of Ukraine,” Mr Rassmussen said.

“If they’re deployed to seal the border and stop the flow of weapons and fighters that would be a positive step. But that’s not what we’re seeing.”