By Gleb Garanich and Anton Zverev
ARTEMIVSK/KONDRATYEVKA, Ukraine (Reuters) - Government forces started pulling out of a town in eastern Ukraine on Wednesday after a fierce assault by Russian-backed separatists which Europe said violated a crumbling ceasefire.
President Petro Poroshenko said before flying to the town of Debaltseve that more than 80 percent of his troops in the rail hub had already left following a heavy bombardment and street-by-street fighting despite the truce that took effect on Sunday.
Rebels say the ceasefire, negotiated by Ukraine, Russia, Germany and France at a summit in Belarus last week, does not apply to Debaltseve, which links the two rebel-controlled regions of eastern Ukraine, Donetsk and Luhansk.
Poroshenko and the West say the rebel assault is being reinforced by Russian tanks, artillery and soldiers, though Moscow denies sending forces to join the battle for a region that President Vladimir Putin has called "New Russia".
"The actions by the Russia-backed separatists in Debaltseve are a clear violation of the ceasefire," European Union foreign policy chief Federica Mogherini said in Brussels, stepping up Western criticism of the rebel offensive on Debaltseve.
"The EU stands ready to take appropriate action in case the fighting and other negative developments in violation of the Minsk agreements continue," she said, making an apparent threat of further economic sanctions on Moscow.
A German government spokesman said the Minsk agreement had been damaged though it made sense to try to implement it.
Putin showed no sign of backing down over Ukraine on Tuesday evening, when he urged Kiev's pro-Western leaders to let their soldiers surrender to avoid more bloodshed.
Hours later, the Ukrainian troop withdrawal was under way. A Reuters witness saw weary Ukrainian troops, their faces blackened, some in columns, some in cars, arriving in Artemivsk, about 30 km (20 miles) north of Debaltseve.
Pro-Kiev commanders said some forces had pulled out but there were reports of continued fighting in the town. A Reuters correspondent near Debaltseve saw black smoke rising over the town and heard loud blasts hours after the withdrawal began.
"The withdrawal of forces from Debaltseve is taking place in a planned and organized way," said Semen Semenchenko, who heads the Donbass paramilitary battalion.
"The enemy is trying to cut the roads and prevent the exit of the troops," he said on Facebook.
News of the withdrawal immediately affected financial markets, with the cost of insuring exposure to Ukrainian debt and the spreads of the country's dollar bonds over safe haven U.S. treasury bills soaring to record highs.
The rouble was largely steady against the dollar.
WITHDRAWAL OF HEAVY WEAPONS
Even before the Ukrainian troops were forced to pull back, last week's peace deal had all but collapsed, with both sides failing to withdraw heavy guns as required after the rebels refused to halt their advance.
Interfax news agency cited the self-proclaimed Donetsk People's Republic as saying that separatists had begun pulling back artillery from rebel-held areas of east Ukraine where fighting had ceased.
Rebels stepped up their offensive on Debaltseve almost immediately after the deal to end the conflict in eastern Ukraine, which has killed more than 5,000 people, was signed on Thursday.
The deal gave both sides until Sunday to lay down their arms, prompting some analysts to suggest the rebels felt they could take the town within that timeframe.
Despite Putin's public call for a surrender, Russia sponsored a resolution adopted by the U.N. Security Council that called on all sides to implement the truce agreement, expressing "grave concern" at the violence.
Russia has already annexed Ukraine's Crimea Peninsula, and Western countries believe Putin's goal is to establish a "frozen conflict" in eastern Ukraine, gaining permanent leverage over a country of 45 million people seeking integration with Europe.
Washington said it was "gravely concerned" by the fighting and was monitoring reports of a new column of Russian military equipment heading to the area.
The United States has been considering sending weapons to aid Kiev, although the State Department said on Tuesday getting into a proxy war with Russia was not in the interests of Ukraine or the world. Putin said he believed foreign weapons were already being supplied to Kiev.
(Additional reporting by Pavel Polityuk, Natalia Zinets, Alessandra Prentice and Richard Balmforth in Kiev, Polina Devitt in Moscow; writing by Elizabeth Piper and Timothy Heritage; editing by Giles Elgood)