Kiev's forces say they attacked a Russian armoured convoy that crossed into Ukraine "and part of it no longer exists".
Military officials in Kiev said they tracked the vehicles, including armoured personnel carriers, from the border and then attacked with artillery.
Ukraine President Petro Poroshenko discussed the incursion with British Prime Minister David Cameron and said a "considerable part of this equipment was destroyed overnight by Ukrainian artillery".
Mr Cameron expressed "grave concerns" at the situation.
Sky's Foreign Affairs Editor Sam Kiley said the attack "is a very serious development" in the four-month conflict, and "could be the beginnings of something much more dangerous".
World stock markets have fallen on the news, with the rouble weakening against the dollar and euro.
Moscow's Defence Ministry denied Ukrainian forces had destroyed a Russian military column, saying no such military force had crossed into eastern Ukraine.
A Russian convoy of trucks carrying humanitarian aid for UkraineIt dismissed Kiev's claims as "some kind of fantasy".
The European Union said it would consider any unilateral military actions by Russia as "a blatant violation of international law".
Around 23 Russian military vehicles crossed the border near the town of Donetsk on Thursday night, according to journalists from The Guardian and The Daily Telegraph.
This was later confirmed by Nato chief Anders Fogh Rasmussen, who said it was a "clear demonstration of continued Russian involvement in the destabilisation of eastern Ukraine".
Ukrainian soldiers at a checkpoint outside DonetskEarlier, British Foreign Secretary Philip Hammond said he was "very alarmed" at the Russian military incursion and summoned the Russian ambassador to clarify the situation.
Meanwhile, the Red Cross said it is still trying to verify that an aid convoy from Russia to Ukraine is carrying nothing more than humanitarian aid.
Ukrainian border guards are checking the cargo on Russian territory near the Ukrainian settlement of Izvaryne, held by separatists.
A dozen Russian armoured trucks are waiting with the aid lorries.
Russian armoured vehicles outside Kamensk-Shakhtinsky in RostovUkraine is concerned the convoy of about 260 vehicles would be used as a 'Trojan horse', allowing Russia to establish a permanent presence in the east.
In an effort to ease tensions, Russian officials allowed journalists to see the contents of trucks.
Among the supplies reporters saw were bottles of water, sacks of buckwheat and portable generators.
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