Vladimir Putin has warned there will be "consequences" if Ukraine has used its army against pro-Russian activists.
Ukraine's interior ministry said "up to five terrorists" have been killed during an operation to clear checkpoints in the eastern town of Slavyansk.
In response to this, and increased Nato activity in the region, Russian troops have begun military exercises near its border with Ukraine.
"We are forced to react to such a development of the situation," Russian Defence Minister Sergei Shoigu was quoted as saying by the Interfax news agency. "If this military machine is not stopped, it will lead to greater numbers of dead."
Mr Putin, the Russian President, said Ukraine's actions in Slavyansk could amount to a "very serious crime against its own people".
Vladimir Putin has warned of consequences He added: "It is simply a punitive measure that will without question have consequences."
There were reports of at least 10 Ukrainian armoured vehicles just north of Slavyansk.
There remains a heavy rebel presence in the city.
One activist, Stella Khorosheva, told The Associated Press: "We will defend ourselves to our last drop of blood. We are ready to repeat Stalingrad."
Ukrainian forces have now withdrawn from the city, according to Reuters.
Ukrainian troops enter Slavyansk Ukraine has re-launched a campaign against pro-Russia insurgents occupying government buildings.
Troops liberated a town hall in eastern Mariupol without any casualties, according to interior minister Arsen Avakov.
He also claimed 70 people led by Russian soldiers raided a Ukrainian base at Artemivsk, wounding one soldier.
With tensions rising, all sides have ramped up their rhetoric.
Sergei Lavrov says the West is behind the Ukraine crisis Russia's Foreign Minister, Sergei Lavrov, accused the West of instigating a "revolution" in Ukraine, culminating in the ousting of pro-Kremlin president Viktor Yanukovych, as part of a "geopolitical game" against Moscow.
"Our Western partners, first and foremost the United States, tried to behave as winners in the Cold War and pretend one can ignore Russia in European affairs," Interfax quoted Mr Lavrov as saying.
US President Barack Obama accused the Kremlin of not honouring an agreement aimed at defusing the Ukraine crisis.
The Geneva accord between Russia, Ukraine, the US and EU compelled armed groups to surrender weapons and leave official buildings.
Mr Obama said further sanctions were "teed up".
Barack Obama issued a warning to Russia during a trip to Japan "We continue to see malicious, armed men destabilising the region, and we haven't seen Russia step out and discourage it," said Mr Obama.
The West has already issued asset freezes and visa bans targeting Russian officials but has ruled out military action.
Mr Putin admitted sanctions were hurting Russia - but claimed the West would also suffer.
"Overall they are causing (damage), because ratings are being reviewed, loans could become more expensive and so forth. But this is of no critical character," he said.
"They are harmful for everyone, they destroy the global economy and are dishonourable on the part of those who use those types of tools."
To add to the tensions, Russia's Gazprom has sent an $11.4bn (£6.7bn) gas bill to Ukraine energy firm Naftogaz - five times the original amount.
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