The two sides have been battling for weeks for control of Debaltseve, and continued conflict there has undermined a truce that apparently went into effect Sunday, raising concerns it is all but dead.
CNN's Nick Paton Walsh called the loss of Debaltseve a huge blow to the Ukrainian government and a win for the separatist militants, who regarded it already as their territory when the front lines for the ceasefire were drawn. It's not yet clear how Kiev will respond.
Ukrainian President Petro Poroshenko, in a taped statement, said Ukrainian armed forces in the area had left Debaltseve according to plan and that Kiev was waiting for two remaining columns to pull back to the new defensive line.
"Debaltseve was under our control, there was no encirclement, and our troops left the area in a planned and organized manner with all the heavy weaponry," he said, according to his office.
Poroshenko said in his conversations with U.S. and European Union
leaders he had called for "a firm reaction from the world to Russia's brutal violation of the Minsk agreements," referring to the ceasefire agreed upon in Belarus.
The President, wearing a camouflage jacket, said he was on his way to the front line to meet with some of the soldiers who have pulled back. "I will be honored to shake their hands," he said.
Ukrainian defense spokesman Andriy Lysenko told a Kiev news conference that the "organized retreat" from Debaltseve should be complete "within hours."
The official news agency of the self-proclaimed Donetsk People's Republic, DAN, earlier quoted separatists as saying there had been a large handover of weapons to the separatist forces in Debaltseve.
Deserted Ukrainian positions
CNN's Paton Walsh, who is near Debaltseve, said deserted roads in the area are strewn with the wreckage of what, only hours earlier, were Ukrainian military positions.
A CNN team passed a checkpoint that had been obliterated as well as an armored personnel carrier that seemed to have been hit by a large explosion. What appeared to be the bodies of two Ukrainian soldiers could be seen there.
Only kilometers away from Debaltseve, the kind of intense shelling that would be expected with bitter fighting could no longer be heard.
It's not clear where the civilians who were trapped by the conflict will go now, Paton Walsh said. The separatists have said they may try to evacuate them later, he said, but they would have to pass through areas that are still contested.
Speaking after news of the withdrawal, NATO Secretary General Jens Stoltenberg urged Russia to withdraw its forces from eastern Ukraine.
"I urge Russia to withdraw all its forces from eastern Ukraine, to stop all its support for the separatists and to respect the Minsk agreement ... and to also use all its influence on the separatists to make them respect the ceasefire," he told reporters in Riga, Latvia.
Russia has steadfastly denied allegations by Kiev and the West that it is sending heavy weaponry and troops over the border into eastern Ukraine.
Lavrov: Don't use Debaltseve as an excuse to derail peace process
Russian Foreign Minister Sergey Lavrov told a news conference in Moscow that Russian President Vladimir Putin
had tried to highlight the danger to thousands of Ukrainian troops encircled in Debaltseve before the ceasefire agreement was signed, but that Poroshenko had denied they were trapped.
The main goal now must be to save the troops' lives, he said.
Lavrov suggested that outside Debaltseve, the weekend ceasefire had taken hold. "Across all conflict lines we can see hostilities have ceased and heavy armor started to be moved," he said.
He urged Kiev and the West not to try to use the situation in Debaltseve as "an excuse to derail the process," saying such reasoning had been used in the past to hinder peace efforts.
OSCE monitors insist on access to Debaltseve
The Organization for Security and Cooperation in Europe, which is tasked with monitoring the ceasefire and a supposed withdrawal of heavy weapons by both sides to create a buffer zone, has not been able to gain access to Debaltseve because of the continued conflict.
The chief monitor of the OSCE monitoring mission in Ukraine, Ertugrul Apakan, said Tuesday that he was "profoundly disturbed" by reports from the town. His monitors plan to try to gain access again Wednesday.
"I am especially concerned about the civilian population of the town," Apakan said. "The sides have a duty to them as well and to each other to adhere strictly to the ceasefire.
"I condemn any attempts to create new facts on the ground, and so to change the basis on which the latest package of measures has been agreed."
He pointed the finger at the separatist leaders in Donetsk and Luhansk, saying that they had effectively denied the OSCE monitors access to Debaltseve, and urged them to end their offensive and allow "unfettered access."
EU foreign policy chief Federica Mogherini said Wednesday that the separatists' actions in Debaltseve were "a clear violation of the ceasefire" and called for the OSCE observers to be allowed in.
"The separatists must stop all military activities. Russia and the separatists have to immediately and fully implement the commitments agreed to in Minsk," she said.
"The EU stands ready to take appropriate action in case the fighting and other negative developments in violation of the Minsk agreements continue."
Diplomats urge parties to abide by truce
Diplomats in New York scrambled Tuesday to shore up the shaky ceasefire agreement
, hammered out by the leaders of Ukraine, Russia, France and Germany last week in Minsk.
The U.N. Security Council
unanimously approved a resolution calling on all parties to abide by the truce, and issued a statement expressing "grave concern at the continued fighting in and around Debaltseve, Ukraine, which has resulted in numerous civilian casualties."
In a call with Poroshenko, U.S. Vice President Joe Biden
warned that if Russia continues to violate the Minsk agreements, "the costs to Russia will rise," according to a White House statement.
Lavrov dismissed Biden's words as "just another example of how the American position is not constructive."
Village under fire
In the beleaguered village of Shyrokyno, Ukrainian forces are struggling to keep control of territory.
Mortar shelling and small arms battles broke out in Shyrokyno on Wednesday morning. Two Ukrainian soldiers were injured, Dmytro Chalov, a spokesman for Ukraine's army in the Mariupol sector, told CNN.
"Right now, only about a third of the village is under our control," a machine gunner named Yury told CNN's Frederik Pleitgen a day earlier.
Oleg Shiryayev, commander of Ukraine's East Corpus battalion, said the ceasefire "is a farce."
"The fighting is continuing now the way it did before," Shiryayev told Pleitgen. "They continue to attack us, shell us; they use artillery, mortars."
But it's impossible to tell which side is responsible for breaking the ceasefire in Shyrokyno.
To some residents, it doesn't matter.
"The fighting is very heavy. All the windows (of) our house are broken," one woman said. "It is very terrifying. We saved all our lives to buy our house, and now we have nothing."