VUHLEHIRSK, Ukraine (Reuters) - Pro-Russian rebels appeared to be in full control on Wednesday of one of the towns that has been a principal target of their advance, as they attempt to surround a nearby garrison of Ukrainian forces.
The apparent fall of the town of Vuhlehirsk would be a setback for Kiev, which has been trying to defend it and the larger neighboring town of Debaltseve, an important rail hub, from encirclement by advancing rebels.
A military spokesman in the capital said Vuhlehirsk was still contested. But Reuters journalists on the ground were freely able to enter about 60 percent of it and saw no sign of areas controlled by Ukrainian troops. Rebels patrolled casually and were in a boisterous mood, using positions in the town to fire artillery on Debaltseve.
Kiev's Western allies are alarmed over the rebel advance in recent weeks, which scuppered a five-month-old ceasefire. U.S. Secretary of State John Kerry is due to visit Kiev on Thursday amid talk that Washington might begin to provide weapons to the Ukrainian government for the first time.
In Vuhlehirsk, shattered from the combat, metal worker Sergey Kopun, 50, dressed in dirty blue overalls, walked out from a cellar where he had been hiding for days with his wife and quadriplegic mother.
"Someone should come to remove these corpses, it is inhumane to leave them here to rot," he said.
About 300 meters (yards) away at least four bodies of soldiers with Ukrainian shoulder patches were scattered inside a garden of what appeared to be a restaurant.
"They had a good firing point here. We had to use anti-tank weapons to blast our way into this garden," said a rebel commander in his 50s who gave his name as Ironside.
The town, with around 9,000 people before the war, has been one of the main targets of the rebel advance, sitting in a pocket of government-held territory surrounded on three sides by rebel territory and straddling road and rail routes linking major rebel strongholds.
Ukrainian forces are still holed up in neighboring Debaltseve, a major rail town of about three times the size and an important stopping point for goods traffic by rail from Russia. Taking the two would link up the main rebel strongholds of Luhansk and Donetsk.
Fighting in a war which has already killed more than 5,000 people has reached an intensity unseen since before a ceasefire in September. An attempt to revive peace talks collapsed on Saturday.
Kiev and its Western allies accuse Moscow of arming and funding the rebels and backing the latest advance with Russian troops on the ground. Moscow denies any involvement.
Ukraine says its military is outgunned by the heavy weaponry rebels have received from Russia. But the prospect of new arms arriving from the United States raises the risk of escalating the war.
Rebels say they had no choice but to advance, to make the cities they control more secure and push back government artillery which had been killing civilians.
At least two shells landed near a hospital in the separatist stronghold Donetsk on Wednesday, killing at least three people.
A statement by the rebel-controlled city administration said an artillery shell had hit the building at noon (0900 GMT), and said five people had been killed and five wounded. Kiev's state prosecutor's office later said from four to 10 people had been killed and blamed the separatists for the attack.
A Reuters cameraman who went to the scene said the hospital had not itself been hit though a shell had left a big crater in the ground 20 meters away. He saw three bodies - one near the hospital and two others on the street. People at the scene said at least two shells had been fired, one after the other.
German Chancellor Angela Merkel, whose country hosts world leaders in Munich at the weekend, said the situation had sharply worsened in east Ukraine and called for the negotiation process not to be abandoned.
The EU's foreign policy chief, Federica Mogherini, condemned the separatist offensive against Debaltseve.
Kiev, supported by the West, insists that a ceasefire agreement reached in Minsk last September with separatist leaders is the only viable roadmap to peace, and the rebels flouted the agreement by seizing swathes of territory.
The rebels appear now to be seeking a new blueprint and want a different format for talks involving senior Ukrainian state officials.
"We have to follow the logic of the Minsk agreement. We need firstly a real ceasefire just to stop continuous shelling and the suffering of people on the ground. We need to agree on the touchline (lines of engagement) and we need to start withdrawing artillery from this line," Ukrainian Foreign Minister Pavlo Klimkin told a group of foreign journalists on Wednesday.
It was important the EU did not relax sanctions on Russia, he said.
A Kiev military spokesman said four soldiers had been killed and 25 had been wounded in fighting against pro-Russian separatists in the previous 24 hours and separatists were continuing attacks on Debaltseve.
Reporting by Natalia Zinets and Pavel Polityuk; Writing by Richard Balmforth; Editing by Peter Graff