Kiev, Bloomberg—Rebels in eastern Ukraine said Tuesday they took control of most of the strategic crossroad town Debaltseve in fighting that’s threatening to undermine a fragile truce.

The self-proclaimed Donetsk People’s Republic said 300 government troops had surrendered as it took control of four-fifths of the rail and highway junction, which links the breakaway regions Donetsk and Luhansk and where thousands of Ukrainian forces are holed up. Ukraine’s military denied soldiers had surrendered and said heavy fighting was taking place in the town’s outskirts. Its troops were holding their positions and repelling separatist attacks with artillery, spokesman Andriy Lysenko said in Kiev.

“The army took 80 percent of the town,” Eduard Basurin, an official with the separatist region’s defense ministry, told Interfax. “It’s only the private residential sector that is left and Debaltseve will be under our control.”

The combat is eroding the latest effort to end 10 months of fighting that’s killed more than 5,600 people and sent Russia’s ties with the United States and Europe to post-Cold War lows. The truce, struck after the leaders of Ukraine, Russia, Germany and France negotiated for 18 hours overnight in the Belarusian capital of Minsk, envisages a withdrawal of heavy weaponry starting Tuesday.

Insurgents from Luhansk said they’d begun pulling back artillery, while those from Donetsk said they weren’t removing arms yet. Ukraine, which reported the deaths of five servicemen in fighting overnight, said it saw no evidence of heavy arms being removed and will begin its own pullback once rebel attacks stop.

Shooting in Ukraine “needs to stop” and “we remain concerned about the continued fighting in and around Debaltseve,” a European Commission spokeswoman told reporters Tuesday in Brussels. “We recall once again the need for all sides to adhere strictly to the provisions of the package signed last week and carry out its measures without delay.”

Data released late Monday laid bare the economic toll of the conflict, which has ravaged the nation’s industrial base. Gross domestic product plunged 15.2 percent from a year earlier, the most in five years. Benchmark dollar debt due 2017 slid 0.3 cent Tuesday to 53.6 cents on the dollar, with Ukraine seeking easier terms from creditors to alleviate its debt burden.

The ruble, the world’s second-worst performer in the past year among global currencies tracked by Bloomberg, strengthened 1.3 percent against the dollar as oil prices advanced.

The EU said Monday that work is “currently ongoing” on potential “further appropriate action” against Russia over the Ukraine crisis. It earlier extended its sanctions blacklist over Ukraine, adding 19 people and nine entities. There are now 151 individuals subject to travel bans and asset freezes, while 37 entities also face penalties.

Ukraine and its allies say Russia supports the separatists with hardware, cash and troops—accusations the Kremlin denies. Russia, which called the EU’s latest move “ridiculous” after the peace deal signed last week, says Ukraine is waging war on its own citizens and discriminates against Russian speakers, who dominate the Donetsk and Luhansk regions.

Ukrainian President Petro Poroshenko agreed with his Russian counterpart Vladimir Putin and German Chancellor Angela Merkel to allow the Organization for Security and Cooperation in Europe to monitor the truce in Debaltseve, German government spokesman Steffen Seibert said Tuesday. The cease-fire isn’t being “comprehensively obeyed,” he said in a statement.

The Obama administration said Monday that it’s “gravely concerned” by the fighting and urged a halt to attacks near Debaltseve. The State Department said “aggressive actions” there and statements by separatists that they would ignore the truce “jeopardize the planned withdrawal of heavy weapons.”

While officials in Kiev say the separatists are blocking OSCE access to Debaltseve, the rebels say they can’t guarantee safety because of Ukrainian attacks. As many as 5,000 people are trapped in the town, the local health department estimates.