August 28, 2014 / 8:20 AM / 3 years ago

CORRECTED-UPDATE 1-Russian shares, rouble tumble as Ukraine peace hopes fade

(Corrects time reference in second paragraph)

MOSCOW, Aug 28 (Reuters) - Russian stock indexes and the rouble fell sharply on Thursday, as reports of fresh Russian military incursions into Ukraine dented hopes of a resolution to the crisis and increased the risk of further western sanctions against Russia.

At 0810 GMT, the dollar-denominated RTS index was down 2.6 percent at 1,228 points, while its rouble-based peer MICEX was 1.9 percent lower at 1,421 points.

"The war in eastern Ukraine has escalated, and the West is calling for a new wave of pressure on Russia. This does not bode well either for Russian or regional sentiment," analysts at Uralsib Capital said in a morning note.

Kiev accused Moscow on Wednesday of further military incursions in support of pro-Russian separatists in eastern Ukraine, two days after revealing that it had captured 10 Russian paratroopers on its territory.

Russia denies military involvement in Ukraine and has said the captured paratroopers probably crossed the border by mistake.

On Thursday, a Ukrainian fighter told Reuters the strategic port of Novoazovsk had been occupied by regular Russian troops disguised as rebel soldiers, a potentially significant escalation that will fuel rumours of large-scale Russian military intervention.

Russian state television reported East Ukrainian pro-Russian separatist leader Alexander Zakharchenko as saying serving Russian soldiers, on leave from their posts, were fighting alongside the rebels.

The accusations follow Tuesday's presidential summit in Minsk between Ukraine's Petro Poroshenko and Russia's Vladimir Putin, which failed to lead to any diplomatic breakthroughs despite discussion of a new ceasefire.

"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,

J.P. Morgan recommended that investors move to underweight positions in Russian and Ukrainian sovereign bonds, arguing that further western sanctions have become more likely given the allegations of Russian regular troops entering Ukraine.

The yield on Russia's 2023 treasury bond was at 9.36 percent on Thursday, up 5 basis points since Wednesday, while the yield on its 2030 Eurobond had risen 14 basis points to 4.73 percent.

The rouble fell sharply, losing 0.77 percent against the dollar to 36.45, 0.84 percent against the euro to 48.14, and 0.83 percent to 41.72 against its dollar-euro basket.

Shares in Sberbank, Russia's top bank, fell 2.8 percent, extending early losses. It 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, editing by John Stonestreet)

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