The Chancellor's office said in a statement that the two leaders, along with British Prime Minister David Cameron, French President Francois Hollande, Italian Prime Minister Matteo Renzi and European Council president Donald Tusk, warned that escalation of the situation in Ukraine could lead to further sanctions against President Vladimir Putin's government.

A key point also raised by Merkel in a telephone conversation with Putin on Monday, was that the Organization for Security and Co-operation in Europe (OSCE) should be allowed to supervise the ceasefire unhindered.

And the leaders agreed that Ukraine should continue to receive financial support and economic advice aimed at reforming the country's economy and allowing it to remain independent.

One such advisor will be former German Social-Democratic Party (SPD) leader and candidate for Chancellor Peer Steinbrück, who confirmed on Tuesday that he would help modernize the country's banking system.

Russia's fingers in the pie

Speaking to reporters in Berlin on Tuesday evening, General Ben Hodges, commander of US Army forces in Europe, said that Russia is supporting Ukrainian separatists with around 12,000 of its own troops.

The soldiers include military advisers, technical specialists for heavy weapons, and front-line troops, he said.

Rebels had also got hold of far more artillery and rockets than they could possibly have captured from government forces.

General Hodges added that Russia had positioned around 29,000 soldiers on the occupied Crimean peninsula, while a further 50,000 were in Russian territory close to the Ukrainian border.

And two OSCE drones that were being used to observe the combat zone were brought down by electronic interference.

“That doesn't happen with equipment you just cobble together in a basement,” Hodges said.

Ceasefire breach

The Ukrainian army accused the pro-Russian rebels of breaching the ceasefire after three soldiers died in the conflict zone.

Nine other soldiers were wounded, said Kiev security council member Andrey Lyssenko.

Defence Minister Stepan Poltorak said that the government might return its heavy artillery to the front lines if the rebels did not hold up their side of the ceasefire agreement.

Meanwhile, the rebels said that their “self-defence” forces had been reacting to “provocations” by government troops.

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