Ukraine says two of its military helicopters have been shot down and two servicemen killed in an assault on the rebel-held town of Sloviansk.
Authorities say the pro-Russian insurgents used shoulder-launched rockets to bring down the two Mi-24 helicopters.
One pilot is reported to have been killed and another captured.
The interim government began the military operation against pro-Russian separatists in Sloviansk on Friday night.
The city is a stronghold for pro-Russian separatists who are exerting increasing control over the eastern regions of the country.
A spokesman for the Russian president, Vladimir Putin, said that Kiev had launched a "punitive operation" in south-east Ukraine, destroying the final hope of keeping alive an accord intended to defuse the Ukraine crisis.
A Ukranian soldier at a checkpoint in Sloviansk. Photo: AFP
Ukraine says its Government forces are continuing an "anti-terror" operation .
Interior Minister Arsen Avakov said one Ukrainian pilot had been killed, and other people wounded. Nine rebel checkpoints had been seized, he said.
But separatists at three Sloviansk checkpoints told the BBC they were still in control there.
Pro-Russian gunmen have shot down at least two helicopters, reportedly capturing one pilot.
The fighting appears to be concentrating on the periphery of the city, says the BBC's Sarah Rainsford in the regional capital Donetsk.
A spokesman for the Donetsk railway says po-Russian separatists have seized the control centre for Donetsk railways in eastern Ukraine, all but stopping trains from running.
This follows a number of buldings being taken over by the separatists and a Ukrainian operation to remove some checkpoints.
Sloviansk is a stronghold for pro-Russian separatists who are exerting increasing control in the region.
On Thursday, Russia's foreign ministry warned that any assaults by Ukraine's troops in the region would have "catastrophic consequences", triggering fears of an invasion by Moscow.
In a statement on Friday , Mr Avakov said the "active phase" of the operation began at 4.30am local time.
He said interior troops and the National Guard were involved in the operation in the Sloviansk-Kramatorsk region.
"The terrorists opened fire with heavy weapons against Ukrainian special units.
"A real battle with professional mercenaries is going on," Mr Avakov said, adding that the separatists were using the tactics of hiding behind civilians in residential buildings.
Russia's state-run Rossiya 24 TV channel said the city was being "stormed".
Earlier, Ukraine's acting President Olexander Turchynov reinstated military conscription to deal with deteriorating security in the east of the country.
Ukraine blames Russia for organising the seizures of a number of offices in the east, a claim Moscow denies.
Some 40,000 Russian troops are stationed near the Ukrainian border.
Mr Turchynov said on Wednesday that his forces were "helpless" to quell the unrest in some parts of the east, saying the goal was now to prevent it from spreading.
He also said Ukraine was on "full combat alert" amid fears that Russian troops could invade.
