President Vladimir Putin on Wednesday told pro-Russian rebels fighting in east Ukraine to halt plans for independence referendums and said his troops had pulled back from the border, in a potential breakthrough in the worst showdown between Moscow and the West since the Cold War.
The Russian leader also hailed a planned May 25 presidential election in Ukraine -- previously criticized by the Kremlin -- as a "move in the right direction".
The surprise comments, delivered during a meeting in Moscow with the visiting head of the OSCE, suggested a potential resolution of the conflict in Ukraine that had been building towards war.
Russia's stockmarket immediately soared over four percent, and the battered ruble jumped to a five-week high against the dollar.
Putin's words came as fighting raged in east and southeast Ukraine, where troops were steadily pushing back pro-Russian rebels who have seized more than a dozen towns.
The United States and Europe were also preparing sanctions to hammer whole swathes of the Russian economy, which is teetering on recession, if the Ukraine presidential poll was scuppered.
Putin said of the estimated 40,000 troops he had ordered to Ukraine's border two months ago: "We have pulled them back. Today they are not at the Ukrainian border but in places of regular exercises, at training grounds."
He told the pro-Russian separatists "to postpone the referendums planned for May 11 in order to create the conditions necessary for dialogue".
But NATO and the White House swiftly said they have seen no sign of a Russian military withdrawal.
While Washington would "certainly welcome" a pull-back, there was "no evidence that such a withdrawal has taken place," White House deputy spokesman Josh Earnest said on Air Force One.
Ukraine's Prime Minister Arseniy Yatsenyuk also accused Putin of "talking through his hat" about the referendums, because they were illegitimate to begin with.
Putin made his declarations after speaking with Swiss President Didier Burkhalter, current chief of the Organization for Security and Cooperation in Europe.
The Russian president's spokesman said afterwards that, if Ukraine now halted its military offensive and started dialogue, "then this can lead Ukraine out of a situation that at this stage is growing only worse.”
Western governments have been increasingly warning of "war" over the worsening violence, and thrown their full weight behind the presidential election called by Kiev's interim leaders as a crucial step to political stability.
British Foreign Secretary William Hague said in Kiev after meeting Ukraine's leaders that Russia had deployed covert fighters and "enormous propaganda" as part of "unacceptable pressure" to block the poll.
US President Barack Obama said last week that if Moscow prevented the election, he would order stepped-up "sectoral" sanctions.
Putin, who has admitted his forces were active in Crimea ahead of its annexation in March but denied their use in east Ukraine, appeared to now back the Ukraine election while voicing skepticism.
"I would like to stress that the presidential election planned in Kiev, while it is a move in the right direction, will not decide anything if all the citizens of Ukraine fail to understand how their rights are protected after the elections are held," Putin said.
Ethnic Russians who make up a large part of the population in the southeastern half of the ex-Soviet nation of 46 million had expressed fears about losing their language and other rights under a new pro-Western government that is likely to emerge after the vote.
Those concerns have fanned the insurgency, which on Wednesday was battling to win back strategic positions lost in recent days to the Ukrainian military offensive.
Officials said 14 troops have been killed, 66 wounded and three helicopter gunships lost in the operation against the rebels, who are estimated to have lost more than 30 fighters.
Clashes and a resulting inferno in the southern port city of Odessa last Friday claimed another 42 lives, most of them pro-Russian activists, pushing the death toll over the past week to nearly 90.
Ukraine's interior ministry said an hour-long battle occurred on a road in the southeastern region, between the cities of Mariupol and Berdyansk, after rebels fired on a bus carrying special forces troops.
The bus driver was wounded, one of the attackers was killed, another two were captured.
Ukrainian security forces also briefly recaptured the separatist-held town hall in Mariupol, near the Russian border, but quickly left when several hundred pro-Russian protesters massed to retake it.
More skirmishes took place around Slavyansk, a rebel-held flashpoint town in the east where most fighting has been concentrated.
Russia's Interfax news agency said pro-Moscow gunmen were trying to recapture the town's TV tower from soldiers who had overrun it two days ago.
In Slavyansk itself, a rebel spokeswoman told AFP that the insurgents were ready to clear out of the town hall they have barricaded themselves inside for nearly a month, depending on the situation. A Russian flag that had been flying over the building was missing on Wednesday.
Ukrainian officials say they are moving cautiously towards the centre of Slavyansk, which has a population of more than 110,000, to avoid civilian casualties.
The interior ministry said it had information that the rebels had booby-trapped the buildings they occupied in the town with explosives, "to accuse Ukrainian authorities of bombing civilians.”
The apparent easing of tensions in the Ukraine crisis came ahead of preparations for commemorations Friday of the Soviet victory over German forces in World War II.
Russian officials and state television have been increasingly portrayed the Kiev government's actions as akin to Nazi-style fascism.
Putin will on Friday oversee a display of Russia military might in Moscow's Red Square.
But celebrations will be more muted in Kiev amid fears of pro-Russian "provocation.” (AFP)