Russia, Ukraine working on cease-fire plan

Russian President Vladimir Putin speaks at a ceremony Wednesday marking the 75th anniversary of the battle of Khalkhin Gol in Ulan Bator, Mongolia. A day before a NATO summit, Putin issued his peace plan for eastern Ukraine, calling on the Russian-backed insurgents there to "stop advancing" and urging Ukraine to withdraw its troops. (Alexei Nikolsky ~ Presidential Press Service)

KIEV, Ukraine -- Russia and Ukraine said Wednesday they are working on a deal to halt months of fighting in eastern Ukraine, but Western leaders expressed skepticism -- noting it wasn't the first attempt to end the deadly conflict.

On the eve of a crucial NATO summit, Ukrainian President Petro Poroshenko's office said he and Russian President Vladimir Putin had agreed on steps for a cease-fire.

In a televised statement, Putin spelled out a seven-point plan for ending hostilities in eastern Ukraine, where Russian-backed separatists scored significant gains last week against government forces after four months of fighting.

Putin, speaking on a visit to Mongolia, said rebels should halt their offensive and the Ukrainian government forces should pull back to a distance that would make it impossible for them to use artillery and rockets against residential areas. He urged international monitoring of a cease-fire, a prisoners exchange and the delivery of humanitarian aid to war-ravaged regions.

Representatives of Russia, Ukraine, the rebels and the Organization for Security and Cooperation in Europe could finalize the peace deal as early as Friday, Putin said.

Poroshenko also voiced hope Friday's talks in the Belarusian capital of Minsk would allow both sides to "take real steps to achieve peace."

He discussed the plan with German Chancellor Angela Merkel, saying it should include the OSCE monitoring of a cease-fire, the withdrawal of foreign troops, a buffer zone on the border and the release of all Ukrainian prisoners held in Russia, according to his office.

The Ukrainian leader met with Putin in Minsk last week, but they didn't announce any agreement after that session.

Ukrainian officials said the bodies of 87 soldiers had been retrieved from the area near the city of Ilovaysk, the scene of a government defeat over the weekend. Ukraine and the West said the rebel offensive was led by regular Russian army units, an allegation Moscow has rejected.

President Barack Obama on Wednesday dismissed the Kremlin denials, saying "Russian combat forces with Russian weapons in Russian tanks" were in eastern Ukraine.

Obama, on a trip to Estonia to reassure allies along Russia's border, said it was too early to say whether the announced truce could hold, noting "we haven't seen a lot of follow-up on so-called announced cease-fires."

Foreign Minister Frank-Walter Steinmeier of Germany, which has been pushing hard for a cease-fire, also was skeptical.

"What we have experienced today is, unfortunately, a bit of a repeat of the Minsk meeting -- there seem to be preliminary agreements, and then things come apart again," Steinmeier said in Hamburg. "It may be a small sign of hope, but whether it is good news will only become clear in the coming days."

Poroshenko announced a unilateral cease-fire in June, but it failed to stop the fighting, with Ukraine and the separatists blaming each other for violating it.

Obama left Estonia for Wales, where he and other Western leaders will attend a NATO summit that starts today.

The alliance is expected to approve plans to station more troops and equipment in Eastern Europe, with the aim of building a rapid response force that could deploy within 48 hours.

Steinmeier hinted at some discord within NATO over Ukraine, saying: "I found that some things that came out of Brussels, from NATO headquarters, in these last few weeks weren't always helpful." But he added that it is Russia, not the alliance, that is responsible for the crisis in Ukraine.

At the same time, the European Union was preparing a new set of economic sanctions against Russia over its actions in Ukraine. EU leaders said over the weekend that the new punishment can be enacted in a week, but Putin now may hope to dodge the blow with the cease-fire deal.

The leaders of Britain, France, Germany and Italy will join Obama for Thursday's summit and are expected to discuss the potential for deeper economic sanctions on Russia.

Miroslav Rudenko, one of the rebel leaders, welcomed a cease-fire plan in remarks carried by the Interfax news agency, saying "there'll be no sense in a military solution to the conflict" if Kiev withdraws its troops.

Putin's demand for Ukrainian forces to pull out from the vicinity of populated areas in the east could be something that has already happened under the brunt of the latest rebel offensive.

Dmitry Trenin, director of the Carnegie Moscow Center, said a truce would be a victory for Putin.

"A cease-fire, in my view, is an important victory for Russia," Trenin told reporters. "And having secured a cease-fire, if it actually goes through, Russia will be bargaining from a position of strength, using the domestic political situation in Ukraine, the economic plight of the country, the social consequences from that plight."

Col. Andriy Lysenko, a spokesman for Ukraine's National Security Council, said the situation in the east is "not simple, but we see a reduction of military activity, a reduction of the use of artillery and other heavy weaponry." He did not give specifics.

Even if the cease-fire holds, negotiating a lasting peace in the east will be a daunting challenge in the conflict, which the U.N. estimates has killed nearly 2,600 people and forced over 340,000 to flee their homes.

Rebels have dropped a demand for full independence, saying they are ready to discuss staying inside Ukraine in exchange for a broad autonomy for mostly Russian-speaking regions in the east -- a stance that reflects Putin's desire to maintain leverage over its neighbor and prevent it from ever joining NATO.

Poroshenko has promised to grant more powers to the provinces, but he has yet to spell out his proposal, and it remains unclear if Russia sees it as sufficient. The Ukrainian leader's attempt to negotiate a compromise with the rebels could put him under fire at home, where many would see it as kowtowing to Moscow.

The peace plan already met stiff resistance from Ukrainian Prime Minister Arseniy Yatsenyuk, who described it as a maneuver by Putin to avoid new Western sanctions -- criticism that appeared to reflect divisions in the Ukrainian leadership.

Stock markets jumped on first reports of a possible cease-fire deal but later eased back slightly. By early afternoon in Europe, Russia's MICEX benchmark was up 2.7 percent, while the ruble rose 1.4 percent against the U.S. dollar.

Germany's DAX index, which has been particularly sensitive to news on the crisis because of the country's economic ties with Russia, was up 1.2 percent.

Also on Wednesday, officials said France suspended the delivery of a warship to Russia at least until November, following pressure from allies. The Vladivostok, the first of two Mistral-class helicopter carriers ordered by Russia, was due to be delivered next month as part of a 1.2 billion euro ($1.6 billion) contract -- the biggest-ever sale of NATO weaponry to Moscow.

Isachenkov reported from Moscow. Peter Leonard in Mariupol, Ukraine, Lynn Berry and Nataliya Vasilyeva in Moscow, Jamey Keaten in Paris and Geir Moulson in Berlin contributed reporting.