Pro-Russian insurgents commandeered six Ukrainian armoured vehicles and hoisted Russian flags over them, dampening the government's hopes of re-establishing control over restive eastern Ukraine.
The Ukrainian soldiers manning the vehicles offered no armed resistance, and masked pro-Russian militias in combat fatigues sat on top as they drove into the eastern city of Slovyansk, a hotbed of unrest against Ukraine's interim government.
In Brussels, Nato announced it was immediately strengthening its military footprint along its eastern border - which often lies next to Russia - in response to Russia's aggression in Ukraine.
The leaders of Russia and Germany, meanwhile, talked about the turmoil in Ukraine but came to very different conclusions, their offices said.
Insurgents in Slovyansk have seized the police headquarters and the administration building, demanding broader autonomy for eastern Ukraine and closer ties with Russia. Their actions have been repeated in at least eight other cities in eastern Ukraine - and the central government says Moscow is fomenting the unrest.
One of the Ukrainian soldiers said they had defected to the pro-Russian side - which raises the spectre of an uprising led by disgruntled Ukrainian forces. But an AP journalist overheard another soldier suggesting they were forced at gunpoint to hand over the vehicles.
"How was I supposed to behave if I had guns pointed at me?" the soldier, who did not identify himself, asked a resident.
Breaking hours of silence, the Ukrainian defence ministry issued a statement saying Ukrainian troops had entered Kramatorsk, south of Slovyansk, on Wednesday morning, where locals and "members of Russian sabotage groups" seized six armoured personnel vehicles and drove them to Slovyansk.
The military said "the whereabouts of the Ukrainian servicemen" were not yet known. The Interfax news agency quoted Miroslav Rudenko, one of the insurgent leaders in Slovyansk, as saying the soldiers will be offered the chance to join a local militia or leave the region.
Eastern Ukraine was the support base for ousted president Viktor Yanukovych, who fled to Russia after months of protests over his decision to reject closer relations with the European Union and turn instead towards Russia.
Reflecting the West's concern over the turmoil in Ukraine, German chancellor Angela Merkel called Russian president Vladimir Putin to discuss the situation and preparations for diplomatic talks tomorrow in Geneva on Ukraine.
The Kremlin said Mr Putin told Mrs Merkel that "the sharp escalation of the conflict places the country in effect on the verge of a civil war".
Mrs Merkel's office said she and Mr Putin had "different assessments" of the events in Ukraine.
Nato secretary general Anders Fogh Rasmussen, meanwhile, said Nato will respond to what he called Russian aggression in Ukraine. Nato aircraft will fly more sorties over the Baltic region and allied ships will deploy to the Baltic Sea, the eastern Mediterranean and elsewhere if needed.
"We will have more planes in the air, more ships on the water and more readiness on the land," Mr Fogh Rasmussen told reporters in Brussels.
Nato says Russia has up to 40,000 troops stationed near its border with Ukraine. Western nations and the new government in Kiev fear that Moscow will use unrest in eastern Ukraine as a pretext for a military invasion.
Ukraine is not a Nato member but several Nato members - Lithuania, Latvia, Estonia and Poland - all border Russia. Nato members Bulgaria, Romania and Turkey also border the Black Sea along with Russia and Ukraine.
In Slovyansk, a Ukrainian city 100 miles (160 kilometres) from the border with Russia, the armoured vehicles stopped near a government building and flew Russian flags while residents chanted: "Good job! Good job!"
One of the men on them, who identified himself only as Andrei, said the unit was part of Ukraine's 25th brigade of airborne forces and they had switched to the pro-Russian side.
"Our bosses made the decision and we obeyed," he said.
His statement could not be independently confirmed.
Some onlookers were happy with the pro-Russian forces.
"We will never allow the fascist Kiev authorities to come here," said Andrei Bondar, 32, a Slovyansk resident.
But Tetyana Kustova, a 35-year-old sales clerk, was appalled by the unrest.
"They are pushing us towards Russia," she said. "They are tearing Ukraine into pieces."
Later, in Pchyolkino, a town south of Slovyansk, tensions boiled over as several hundred residents surrounded 14 Ukrainian armoured vehicles. Fearing the troops were sent to quell them, the crowd refused to let the vehicles leave despite the pleas of a Ukrainian officer. The crowd was later reinforced by pro-Russian gunmen.
To end the stand-off, leaders in the crowd told Lt Colonel Oleksandr Shvets they would let his 100-strong troops go if they handed over the magazines from their assault rifles. The soldiers took the magazines off, put them in plastic bags and gave them to the pro-Russian insurgents.
"We are really tired of all of this confusion," said Sgt Dmytro Mokletsov. "It's really scary giving away the magazines. We have no weapons now. But we were told to, it was an order."
The column of APCs was preparing to leave the area.
In the eastern regional capital of Donetsk, armed militias seized the mayor's office, demanding that the Kiev government hold a vote on giving the east more autonomy.
"We have come into this building so that Kiev accepts our demands, the demands of the ordinary people of Donbass, to adopt a law on local referendums," said militiaman Alexander Zakharchenko.
In Kiev, prime minister Arseniy Yatsenyuk accused Russia of orchestrating the unrest.
"Russia has got a new export now, apart from oil and gas: Russia is now exporting terrorism to Ukraine," Mr Yatsenyuk told a cabinet meeting. "Russia must withdraw its sabotage groups, condemn terrorists and liberate all administrative buildings."
Russian markets have been rattled by the tensions between Moscow and Ukraine, where Russia annexed the Black Sea region of Crimea last month.
The Russian economy slowed sharply in the first three months of the year as spooked investors pulled money out of the country.
Russian economy minister Alexei Ulyukayev told parliament that growth was only 0.8% in the first quarter - far short of the ministry's earlier prediction of 2.5% - because of "the acute international situation of the past two months" as well as "serious capital flight".
The main stock index in Moscow tanked 10% in March, wiping out billions in market capitalisation. In the first three months of 2014, the rouble lost 9% against the dollar, making imports more expensive, while spooked investors pulled about 70 billion dollar out of the country - more than in all of 2013.