UPDATE 4-Train carrying MH17 bodies reaches government-held Ukrainian city
* Victims' bodies to be handed to Netherlands
* Some remains still at crash site - OSCE
* EU ministers delay action on further sanctions
* Russia challenges accusations that separatists behind disaster (Adds address by Malaysian PM to parliament)
By Anton Zverev and Peter Graff
DONETSK, Ukraine, July 22 (Reuters) - A train carrying the remains of many of the 298 victims of Malaysia Airlines flight MH17 arrived in a Ukrainian government-held city on Tuesday on the first leg of their final journey home to be reclaimed by their families.
Five refrigerated wagons containing 200 body bags reached the city of Kharkiv after pro-Russian separatists agreed to hand over the plane's black boxes to Malaysian authorities and the bodies to the Netherlands, where many victims had lived.
The train slowly rolled into the grounds of an arms industry plant, where the remains are due to be unloaded and flown to the Netherlands for the lengthy process of identification. A spokeswoman for a Dutch team of forensic experts in Kharkiv said departure was not expected before Wednesday.
A representative of the OSCE European security watchdog said there were still human remains left where the Boeing 777 hit the ground in eastern Ukraine last Thursday. "We did not observe any recovery activity in place," spokesman Michael Bociurkiw said after his group inspected the site earlier in the day.
The jet was flying from Amsterdam to Kuala Lumpur when it was shot down near Donetsk, a stronghold of pro-Russian rebels, where fighting with Ukrainian troops flared again on Tuesday.
Western governments have threatened Russia with broader sanctions for what they say is its backing of the militia. However, they are struggling to agree a response, and European Union ministers meeting in Brussels on Tuesday delayed action for a few days.
Russian President Vladimir Putin said he would urge the separatists to allow a full investigation which the Netherlands said it would lead. Malaysia said it would send the black boxes to a British lab for analysis.
"Here they are, the black boxes," separatist leader Aleksander Borodai told journalists at the headquarters of his self-proclaimed Donetsk People's Republic as an armed rebel placed the boxes on a desk.
Malaysian Prime Minister Najib Razak, speaking to parliament in Kuala Lumpur on Wednesday, maintained his stand that blame should not be apportioned pending an investigation.
"A few hours after MH17 crashed, officials in the U.S. and Ukraine claimed it was shot down," Najib said.
"If that is true, we criticise the party believed to be responsible. However, we are not pointing fingers at anyone at this stage, until evidence has really been obtained."
Najib's cautious approach enabled him to work through intermediaries to reach Borodai and broker a deal to retrieve the black boxes and secure the release of the bodies.
A small group of Malaysian air crash experts became the first international accident investigators to reach the site on Tuesday, escorted by a convoy of international monitors and heavily armed separatist fighters.
As they went about their work, loud explosions were heard on the outskirts of Donetsk, some 60 km (40 miles) from the site One shell was sticking out from a hole outside a residential block with a pool of blood next to it.
"A woman was killed here, her son was sitting next to her crying," said Tamara Lelyk, a 73-year-old cleaning lady.
The shooting down of the airliner has sharply deepened the Ukrainian crisis, in which separatist gunmen in the Russian-speaking east have been fighting government forces since pro-Western protesters in Kiev forced out a pro-Moscow president and Russia annexed Crimea in March.
Putin said a Ukrainian military "tank attack" on Donetsk was "unacceptable" and urged the West to put pressure on Kiev to end hostilities.
But Ukraine's parliament approved a presidential decree to call up more military reserves and men under 50 to fight the rebels in eastern Ukraine and to protect the border where there is a concentration of Russian troops.
Andriy Lysenko, a spokesman for Ukraine's Security Council, said 13 Ukrainian troops were killed in fighting in the east in the last day when "terrorists" attacked the army and their roadblocks 20 times.
The rival sides were now fighting around the city of Lysychansk, about 130 km northeast of Donetsk, he said. Kiev also said it recaptured the adjacent town of Severodonetsk and the rebels confirmed they were forced out.
Shaken by the loss of life on the airliner, Western governments have threatened Russia with stiffer penalties.
In Brussels, EU foreign ministers raised the possibility for the first time of restricting Russian access to European capital markets, defence and energy technology, asking the executive European Commission to draft proposals this week.
France said it would deliver a second helicopter carrier to Russia despite opposition from the United States and Britain, highlighting the difficulties in reaching an agreement on a response from Western powers.
Diplomats say more serious sanctions against whole sectors of the Russian economy will depend largely on the line taken by the Netherlands, because of the high number of Dutch victims.
At the United Nations, the Security Council unanimously adopted a resolution on Monday demanding those responsible "be held to account and that all states cooperate fully with efforts to establish accountability".
It also demanded that armed groups allow "safe, secure, full and unrestricted access" to the crash site.
Putin noted an increased use of language of "ultimatums and sanctions" towards Russia and called for more dialogue with the West.
Alexei Kudrin, a former Russian finance minister and loyal Putin ally, warned that rising anti-Western rhetoric during the crisis could isolate the nation and derail its modernisation.
"The political landscape in our country has changed significantly," he told the state-run ITAR-TASS news agency. "We have again become the West's adversaries."
U.S. President Barack Obama said it was time for Putin and Russia "to pivot away from the strategy that they've been taking and get serious about trying to resolve hostilities within Ukraine." He said Russia had a direct responsibility to compel separatists to cooperate with the investigation.
European security monitors said gunmen stopped them inspecting the site on Friday and Ukrainian officials have said separatists tampered with evidence at the crash site.
But the spokesman for the European security monitors said they had unfettered access on Monday, and a Dutch victims identification team was allowed to inspect the storage of the bodies in refrigerated rail cars before they left for Kharkiv.
The Malaysian crash experts walked through the wheat fields by the wreckage, making notes and taking photographs on Tuesday.
Russia's Defence Ministry has challenged Western accusations that pro-Russian separatists were responsible for shooting down the airliner and said Ukrainian warplanes had flown close to it.
The ministry also rejected accusations that Russia had supplied the rebels with SA-11 Buk anti-aircraft missile systems - the weapon said by Kiev and the West to have downed the airliner - "or any other weapons". (Additional reporting by Natalia Zinets, Pavel Polityuk and Gabriela Baczynska in Kiev; Sergei Karazy in Kharkiv; Justyna Pawlak and Adrian Croft in Brussels; Darya Korsunskaya and Lidia Kelly in Moscow,Trinna Leong in Kuala Lumpur; Writing by Anna Willard; Editing by Giles Elgood, David Stamp and Ron Popeski)
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