Novoazovsk was hit by shells on Wednesday.
Pro-Russian separatists in eastern Ukraine have pushed their way into the port of Novoazovsk, threatening to open up a new front in the war.
The mayor of the town on the Sea of Azov confirmed rebels had entered, as jubilant rebel supporters shared photos of advancing tanks on social media.
The rebels have been trying for weeks to break out of a near-encirclement further north in Donetsk.
Russia denies it is covertly supporting them on the ground.
The fighting came hours after Ukrainian President Petro Poroshenko promised a “roadmap” for peace in the east.
He was speaking in Belarus late on Tuesday after holding his first direct talks on the crisis since June with Russian President Vladimir Putin.
Mr Putin said Russia, which denies supplying the rebels with weapons and covert forces, would assist with a dialogue, but he insisted that stopping the fighting was a matter for Ukraine alone.
‘One hundred vehicles’
In a brief phone call, mayor Oleg Sidorkin told AP news agency the rebels had penetrated into Novoazovsk. There were no immediate details on the size of the rebel force but Russian media reports said Ukrainian forces had retreated in a hurry.
Earlier on Wednesday, rebel forces fired at least ten shells into Novoazovsk, a town of 12,700 people, AP reported from the scene. Four people were wounded in shelling the previous day, the mayor was quoted as saying.
Heavy weapons are routinely used by both sides in the fighting which has raged since mid-April, when Kiev sent in security forces to put down the rebellions in the Donetsk and Luhansk regions.
Seven villages to the north of Novoazovsk were also captured by the separatists, officials in Kiev said.
National guardsman have been defending Novoazovsk.Soldiers fighting in Ilovaisk on Tuesday.
Novoazovsk lies far to the south of Donetsk region, near the port city of Mariupol, where Ukrainian security forces dislodged rebels in June.
Closer to the city of Donetsk itself on Wednesday, Ukrainian security forces said a column of 100 vehicles had been seen travelling in a southerly direction from Starobesheve to Telmanove.
These vehicles, which included tanks, armoured troop carriers, Grad multiple and rocket launchers systems, were marked only with “white circles or triangles”, the Anti-Terrorist Operation press centre said.
An unnamed Ukrainian defence source told AFP news agency that the vehicles had to be Russian.
Seeking to verify the report, an AFP journalist found traces of caterpillar tracks pointing south on the road between Starobesheve and Telmanove.
The journalist also heard explosions in the area and was told by a local resident that there had been fighting at Starobesheve overnight.
War in eastern Ukraine: The human cost
- At least 2,119 people had been killed and 5,043 wounded since mid-April, a UN report on 7 August said.
- 951 civilians have been killed in Donetsk region alone, the official regional authorities said on 20 August.
- Official casualty counts only record certified deaths while in some particularly dangerous parts of the war zone, such as Luhansk region, victims are said to have been buried informally, for instance in gardens.
- Rebels (and some military sources) accuse the government of concealing the true numbers of soldiers killed.
- 155,800 people have fled elsewhere in Ukraine while at least 188,000 have gone to Russia.
‘Are we fighting?’
Rebel commanders in Donetsk told Russian media that 129 Ukrainian soldiers had surrendered at Starobesheve on Wednesday, in a claim that could not be verified independently.
According to the rebels, a further 94 soldiers surrendered to them on Wednesday further east, in the town of Kuteinykove.
Meanwhile, the two sides are still battling for control of the town of Ilovaisk, amid claim and counter-claim over its capture and the number of casualties.
Accusations that Russia is sending both weapons and men into eastern Ukraine gathered force this week when 10 Russian paratroopers were captured on Ukrainian territory, near the Russian border.
Russian soldiers was captured in Ukrainian territory.
President Putin sought to play down the incident when he spoke to reporters in the Belarusian capital Minsk on Wednesday, where he met Mr Poroshenko.
“From what I have heard, they were patrolling the border and could have ended up on Ukrainian territory,” he said.
However, liberal Russian business newspaper Vedomosti raised concern on Wednesday that Russia was waging a covert war on the rebel side in eastern Ukraine.
In an editorial (in Russian) headlined, “Are we fighting?”, it pointed to the case of the captured paratroopers as well as mysterious funerals for Russian soldiers, some of whom were said officially to have died on training exercises.