UPDATE 2-Russian shares, rouble fall on reports Russian troops entered Ukraine

Thu Aug 28, 2014 11:07am EDT

(Adds comment, updates prices)

By Jason Bush and Zlata Garasyuta

MOSCOW Aug 28 (Reuters) - Russian stock indexes and the rouble plunged on Thursday as Ukraine accused Russia of sending its army to support separatist rebels in eastern Ukraine, increasing the likelihood of new western sanctions against Russia.

At 1415 GMT, the dollar-denominated RTS index had plunged 3.9 percent to 1,212 points. The rouble-based MICEX was 2.1 percent lower at 1,418 points.

Ukraine's President Petro Poroshenko cancelled a trip to Turkey and called an emergency meeting of his defence chiefs because Russian troops had entered the country.

Russian asset prices were already falling on Thursday morning, following earlier Ukrainian claims that Russian troops were involved in capturing Novoazovsk, a Ukrainian port on the Sea of Azov.

Adding to the tension, Russian state television reported that Alexander Zakharchenko, the leader of pro-Russian separatist rebels in eastern Ukraine, had said serving Russian soldiers on leave were fighting alongside the rebels.

NATO also said on Thursday that more than 1,000 Russian troops were operating inside Ukraine.

Direct Russian military intervention in eastern Ukraine has been among the deepest worries of investors in Russian stocks. Any such move is likely to provoke further western sanctions against Russia that could damage its economy or major companies.

"From all this, it follows that the Kremlin is determined to fight to the end with Ukraine. I fear that a new wave of sanctions against Russia could follow - already more serious ones," said Vadim Bit-Avragim, senior portfolio manager at Kapital.

The latest market plunge followed a rally in the two weeks leading up to Aug 26, when Poroshenko met with Russia's Vladimir Putin at a summit in Minsk to discuss peace proposals. But the summit produced no diplomatic breakthroughs and was followed by counter-attacks on Ukrainian forces by the rebels.

"We believe that financial markets have become excessively optimistic in the glow of encouraging statements. The fighting appears likely to continue," J.P. Morgan said in a research report, recommending that investors move to underweight positions in Russian and Ukrainian sovereign bonds.

The yield on Russia's 2023 treasury bond was at 9.64 percent on Thursday, up 31 basis points since Wednesday. The yield on its 2030 Eurobond had risen 30 basis points to 4.88 percent.

The rouble fell sharply, reaching its weakest point against the dollar since March, when it dropped to a record low of 37. It lost 1.9 percent against the dollar to 36.87, 1.7 percent against the euro to 48.54 and 1.8 percent to 42.13 against its dollar-euro basket.

Investors ignored better-than-expected financial results from Sberbank, Russia's top bank, which was down 4 percent as the general sell-off weighed on liquid stocks.

Sberbank reported results that showed a 2.3 percent fall in first half net profit and a 13 percent rise in second quarter net profit, beating analysts' forecasts.

For rouble poll data see

For Russian equities guide see

For Russian treasury bonds see

Russia in graphics: link.reuters.com/dun63s (Reporting By Jason Bush and Zlata Garasyuta, editing by Larry King)