Kiev: Ukrainian government forces pressed pro-Russian separatists in fighting overnight into Monday, encircling the rebel-held town of Horlivka and taking control of smaller settlements in eastern Ukraine, the military said.
A military statement said it suspected the rebels had fired back with a powerful Russian-made Uragan missile system south east of Donetsk near the village of Novokaterinivka, their first use of the weapon.
It gave no indications of casualties on either side and the rebels made no immediate comment.
Ukrainian forces say they have been steadily pushing back the rebels and cutting off their communication lines in the four-month conflict in the east.
The separatist conflict erupted after Russia annexed Ukraine`s Crimean peninsula following the ousting of a Moscow-backed president in the capital Kiev. Separatists occupied key buildings in towns across the Russian-speaking east, declaring `people`s republics` and saying they wanted to join Russia.
"The settlement points of Malaya Ivanivka and Andrianivka have been fully cleared (of rebels). The settlement of Alchevsk is now completely isolated. Horlivka is totally blockaded," the statement said.
Horlivka, a town of more than 230,000 which has been in the hands of the rebels from early on in the conflict, has strategic value since it lies just north of the main road linking Donetsk and Luhansk.
"The Russian mercenaries are in panic trying to get out of these places," the Ukrainian military statement said.
Of the rebel missile attack at Novokaterinivka, it said: "The attack in all probability was from a 9P 140 Uragan. This is the first time that such a powerful weapon has been used."
The Kiev government has accused Russia, which is opposed to Kiev`s pro-Western policies, of allowing a steady flow of tanks, missile systems and armoured vehicles to the rebels.
Moscow denies this. It says that the Ukrainian government, with backing from its Western allies, is subjecting millions of Russian-speakers in eastern Ukraine who reject Kiev`s rule to artillery bombardments and shortages of water and power.