(Adds Kerry, Hagel comments, paragraphs 4-6, 17)
* Kiev Interior Ministry forces, army take rebel checkpoints
* Putin warns of consequences after "punitive operation"
* Kerry says Moscow's window to change course "is closing"
By Aleksandar Vasovic and Alexei Anishchuk
SLAVIANSK, Ukraine/ST PETERSBURG, Russia, April 24 (Reuters)
- U krainian forces killed up to five pro-Moscow rebels on
Thursday as they closed in on the separatists' military
stronghold in the east, and Russia launched army drills near the
border in response, raising fears its troops would invade.
The Ukrainian offensive amounts to the first time Kiev's
troops have used lethal force to recapture territory from the
fighters, who have seized swaths of eastern Ukraine since April
6 and proclaimed an independent "People's Republic of Donetsk."
Ukraine's acting president accused Moscow of supporting
"terrorism at the state level" against his country for backing
the rebels, whom the government blames for kidnapping and
torturing a politician found dead on Saturday.
"The window to change course is closing," U.S. Secretary of
State John Kerry warned in a hastily arranged appearance in the
State Department, where he cited President Barack Obama's
comments earlier on Thursday that Washington was ready to impose
new sanctions if Moscow did not alter its policy.
In unusually blunt comments, Kerry accused Russia of using
propaganda to hide what he said it was actually trying to do in
eastern Ukraine - destabilize the region and undermine next
month's planned Ukrainian presidential elections.
"So following today's threatening movement of Russian troops
right up to Ukraine's border, let me be clear," Kerry said. "If
Russia continues in this direction, it will not just be a grave
mistake, it will be an expensive mistake."
Russian President Vladimir Putin said sanctions were
"dishonourable" and destroyed the global economy but that so far
the damage had not been critical.
The Ukrainian Interior Ministry said its forces backed by
the army had removed three checkpoints manned by armed groups in
the separatist-controlled city of Slaviansk.
"During the armed clash, up to five terrorists were
eliminated," it said in a statement, adding one person had been
wounded on the side of the government forces.
A rebel spokeswoman in Slaviansk said two fighters had died
in a clash in the same area, northeast of the city centre.
Slaviansk's separatist self-proclaimed mayor, Vyacheslav
Ponomaryov, quoted on a local news site, said one man was shot
dead and another badly wounded on the northeastern outskirts of
the city. He said the dead had been unarmed.
The Kremlin, which says it has the right to invade its
neighbour to protect Russian speakers, has built up forces on
Ukraine's border - estimated by NATO at up to 40,000 troops.
Defence Minister Sergei Shoigu announced Moscow had launched
military drills near the border in response to "Ukraine's
military machine" and NATO exercises in Eastern Europe. Kiev
demanded an explanation within 48 hours of action on the border.
Russia seized and annexed the Crimean peninsula from Ukraine
last month after President Vladimir Putin overturned decades of
post-Cold War diplomacy by announcing the right to use military
force in neighbouring countries.
An invasion of mainland Ukraine's industrial heartland would
be a far more serious action. It had seemed beyond contemplation
only weeks ago but now looks like a real threat, although the
full extent of Putin's territorial ambitions remains a mystery.
In St Petersburg, Putin said that if the authorities in Kiev
had used the army in eastern Ukraine, it would be a very serious
crime against their own people.
"It is just a punitive operation and it will of course incur
consequences for the people making these decisions, including
(an effect) on our interstate relations," Putin said in a
televised meeting with regional media.
U.S. Defence Secretary Chuck Hagel voiced concern about
reports of Russian military activity, telling reporters during
a visit to Mexico City: "This is dangerously destabilizing and
it's very provocative."
Russia's Foreign Ministry responded that it was up to
Washington to halt the Ukrainian military action, and "force the
Kiev authorities, who are wards of the United States, to
restrain themselves and not use force."
Reuters journalists saw a Ukrainian detachment with five
armoured personnel carriers take over a checkpoint on a road
north of Slaviansk in the late morning after it was abandoned by
separatists who set tyres alight to cover their retreat.
But two hours later, the troops pulled back and it was
unclear if Kiev would risk storming Slaviansk, a city of 130,000
that has become the military stronghold of a movement seeking
annexation by Moscow of Ukraine's industrialised east.
'FINISH WHAT WE HAVE STARTED'
At another checkpoint set up by the Ukrainian military, a
soldier said they were there to instil law and order.
"Those separatists, they violated the constitution, they are
torturing the country, they violated laws, they do not recognise
the authority of police, so the army had to move in and we will
finish what we have started, so help me God," he said.
Under an accord signed by Russia, Ukraine, the United States
and the European Union in Geneva last week, illegal armed groups
are supposed to disarm and go home, including the rebels
occupying about a dozen buildings in the largely
Washington accuses Moscow of sending agents to coordinate
the unrest in the east, as it did before seizing Crimea last
month. Russia denies it is behind the uprising and says the
separatists are responding spontaneously to hostility from Kiev.
Russia made similar denials over Crimea until Putin acknowledged
last week his troops had indeed acted alongside local militia.
"At the state level, Russia is supporting terrorism in our
country," Ukraine's acting president, Oleksander Turchinov, said
in an address to the country on Thursday. "Armed criminals have
taken over buildings, are taking citizens, Ukrainian and foreign
journalists, hostage and murdering Ukrainian patriots."
Turchinov called for the eastern offensive this week after
the apparent torture and murder of a pro-Kiev town councillor
whose body was found on Saturday near Slaviansk.
Volodymyr Rybak had disappeared after being filmed trying to
take down a separatist flag while attempting to enter the
rebel-held town hall where he worked in Horlivka, near
"He was bruised and punctured from head to toe ... it's
clear they tortured him," said Aleksander Yaroshenko, a family
friend who accompanied Rybak's widow when she identified his
body at the morgue. "The police have lots of details, they have
CCTV footage, they should know who did this," he told Reuters.
Rebels in Slaviansk released U.S. citizen Simon Ostrovsky,
one of three journalists they were believed to be holding.
Moscow called for Kiev to release "political prisoners",
including a pro-Russian activist named Pavel Gubarev.
U.S. TROOPS ARRIVE IN POLAND
So far, the United States and the EU have taken only mild
action against Moscow, imposing visa bans and asset freezes on a
few Russians, measures Moscow has scoffed at as meaningless.
Washington and Brussels both say they are drafting more serious
sanctions and will impose them if the Geneva deal collapses.
Even without serious sanctions, Russia's confrontation with
the West has hurt its economy as fearful investors send their
money abroad. Mutual funds specialising in Russia and Eastern
Europe were the 30 worst performers out of 3,489 equity funds
for sale in Britain in the three months ending in March.
But Moscow also flexed its economic muscles, with the
government suggesting foreign firms that pull out of the country
may not be able to get back in. A source at Gazprom said the
Russian exporter had slapped an additional $11.4 billion bill on
Kiev. Ukraine is negotiating to reverse east-west pipelines so
that it can receive gas from Europe if Moscow cuts it off.
In NATO-member Poland, the first group of a contingent of
about 600 U.S. soldiers arrived on Wednesday, part of an effort
by Washington to reassure Eastern European allies who are
worried by the Russian buildup near Ukraine's borders.
But NATO and the United States have made clear they will not
use military force to protect Ukraine itself.
Shoigu, the Russian defence minister, said aircraft would
fly increased patrols near the Ukrainian frontier as part of the
new exercises. Two local residents in the area told Reuters they
had seen attack helicopters flying in formation.
Kiev said the city hall in another eastern town, Mariupol,
which had been seized, was back under central control. A
separatist crowd later surrounded the building, patrolled by
police but otherwise apparently empty.
Ukraine, a former Soviet republic, slid into unrest late
last year when Moscow-backed President Viktor Yanukovich
rejected a pact to build closer ties with Europe. Protesters
took over central Kiev and he fled in February. Days later,
Russian troops seized control of Crimea.
The Ukrainian Defence Ministry confirmed its involvement in
the operation around Slaviansk on Thursday, saying the troops
involved were airborne units with experience of such tasks from
international peacekeeping missions.
Unarmed mediators from the Organization for Security and
Cooperation in Europe are in eastern Ukraine trying to persuade
pro-Russian gunmen to go home, in line with the Geneva accord.
Reuters reporters have not been able to establish that any
Russian troops or special forces members are on the ground,
although Kiev and Western powers say they have growing evidence
that Moscow has a presence. Masked gunmen in the east, widely
referred to as "green men", wear uniforms without insignia.
(Additional reporting by Alexander Reshetnikov and Gleb
Garanich near Slaviansk, Alissa de Carbonnel in Donetsk, Pavel
Polityuk, Natalia Zinets, Richard Balmforth and Alastair
Macdonald in Kiev, Denis Dyomkin in Birobidzhan, Russia, Mark
Felsenthal in Tokyo, Alessandra Prentice and Vladimir Soldatkin
in Moscow, David Alexander in Mexico City, and Arshad Mohammed
in Washington; Writing by Christian Lowe, David Stamp, Philippa
Fletcher, Peter Graff and Peter Cooney; Editing by Mohammad