* Ukrainian president says situation "extraordinarily difficult"
* Rebels advance in southeast, capture coastal town
* NATO source says more than 1,000 Russian troops in Ukraine
* Western officials dispute Russian denials of involvement
* Merkel says EU to consider more sanctions vs Russia (Adds comments by Obama, U.N. envoys)
By Richard Balmforth and Pavel Polityuk
KIEV, Aug 28 (Reuters) - Ukraine's president said on Thursday that Russian troops had entered his country in support of pro-Moscow rebels who captured a key coastal town, sharply escalating a separatist war and prompting anger and alarm among Kiev's Western allies.
U.S. and British officials took strong issue with Russia's denials it had sent combat forces into Ukraine and threatened to impose stiffer economic sanctions on Moscow. But U.S. President Barack Obama stopped short of calling Russia's actions an invasion.
Ukrainian President Petro Poroshenko told his security chiefs the situation was "extraordinarily difficult ... but controllable" after Russian-backed rebels seized the town of Novoazovsk in the southeast of the former Soviet republic.
Earlier, Poroshenko said he had cancelled a visit to Turkey because of the "rapidly deteriorating situation" in the eastern Donetsk region, "as Russian troops have actually been brought into Ukraine".
Russia's Defence Ministry again denied the presence of its soldiers in Ukraine, using language redolent of the Cold War.
"We have noticed the launch of this informational 'canard' and are obliged to disappoint its overseas authors and their few apologists in Russia," a ministry official, General-Major Igor Konashenkov, told Interfax news agency. "The information contained in this material bears no relation to reality."
But Western governments were losing patience with Moscow's denials.
Referring to talks that Russian President Vladimir Putin held with Poroshenko just two days ago, British Prime Minister David Cameron said: "It is simply not enough to engage in talks in Minsk, while Russian tanks continue to roll over the border into Ukraine. Such activity must cease immediately."
London's ambassador to the United Nations, Mark Lyall Grant, told a Security Council meeting: "Units of the armed forces of the Russian federation are now directly engaged in fighting inside Ukraine against the armed forces of Ukraine."
"The evidence is overwhelming," he added.
Washington's U.N. envoy, Samantha Power, was also scornful of Moscow's denials, saying: "At every step, Russia has come before this council to say everything except the truth. It has manipulated, it has obfuscated, it has outright lied."
"The mask is coming off," she added. "In these acts, these recent acts, we see Russia's actions for what they are: a deliberate effort to support, and now fight alongside, illegal separatists in another sovereign country."
Russia's U.N. ambassador, Vitaly Churkin, responded: "There are Russian volunteers in eastern parts of Ukraine. No one is hiding that." He said he had a message to the United States: "Stop interfering in the internal affairs of sovereign states."
Global stock markets fell on news of the worsening crisis, which has prompted the United States and European Union to impose sanctions on Moscow and led both Russia and NATO to step up military exercises, creating the worst East-West standoff since the Soviet Union collapsed in 1991.
Obama spoke by telephone on Thursday with German Chancellor Angela Merkel, and the White House said they agreed the United States and Europe should consider more sanctions.
Rebel advances this week have opened a new front in the conflict just as Ukraine's army appeared to have gained the upper hand, virtually encircling the separatists in their main strongholds of Donetsk and Luhansk.
A Ukrainian presidential spokesman said on Twitter that Poroshenko's central message to his security chiefs was: "We are capable of defending ourselves. The main thing is not to panic."
The defence and security council said it was reintroducing compulsory military service from this autumn, but conscripts would not serve in the conflict zone.
Earlier, the council said Novoazovsk, on the Azov Sea, and other parts of southeast Ukraine had fallen under the control of Russian forces, and a counter-offensive by Russian troops and separatist units was continuing.
It said Ukrainian government forces had withdrawn from Novoazovsk "to save their lives" and were now reinforcing defences in the port of Mariupol farther west, which a rebel leader said was the separatists' next objective.
"Today we reached the Sea of Azov, the shore, and the process of liberating our land, which is temporarily occupied by the Ukrainian authorities, will keep going further and further,"
Alexander Zakharchenko, prime minister of the self-proclaimed Donetsk People's Republic, told Reuters in an interview.
He said there were about 3,000 Russian volunteers serving in the rebel ranks.
Putin called on pro-Russian rebels to provide a humanitarian corridor in east Ukraine for encircled Ukrainian government troops to leave the battlefield, the Kremlin said.
Ukrainian Prime Minister Arseny Yatseniuk appealed to the United States, EU and G7 countries "to freeze Russian assets and finances until Russia withdraws armed forces, equipment and agents".
Anton Gerashchenko, an adviser to Ukrainian Interior Minister Arsen Avakov, said on Facebook: "The invasion of Putin's regular Russian army of Ukraine is now an established fact!"
Despite Moscow's denials, two human rights advisers to Putin said more than 100 Russian troops had died in Ukraine in a single attack on Aug. 13, and one of them said she considered Russia's actions an invasion.
"When masses of people, under commanders' orders, on tanks, APCs and with the use of heavy weapons, (are) on the territory of another country, cross the border, I consider this an invasion," Ella Polyakova told Reuters.
Polyakova and Sergei Krivenko - another member of the council that has no legal powers and an uneasy relationship with the Kremlin - said their information on the Aug. 13 attack was based on accounts by witnesses and relatives of the dead.
They said the troops had been in trucks filled with ammunition. "A column of Russian soldiers was attacked by Grad rockets and more than 100 people died. It all happened in the city of Snizhnye in Donetsk province," Krivenko said.
In southern Russia on Thursday, a Reuters reporter saw a column of armoured vehicles and dust-covered troops, one of them with an injured face, about 3 km (2 miles) from the border with the part of Ukraine that Kiev says is occupied by Russian troops.
The column was driving east, away from the border, across open countryside near the village of Krasnodarovka, in Russia's Rostov region.
None of the men or vehicles had standard military identification marks, but the reporter saw a Mi-8 helicopter with a red star insignia - consistent with Russian military markings - land next to a nearby military first-aid tent.
Asked if he was with the Russian military, a man near the tent in camouflage fatigues but without any identifying insignia, said only: "We are patriots."
The U.S. ambassador to Kiev, Geoffrey Pyatt, tweeted: "Russian supplied tanks, armored vehicles, artillery and multiple rocket launchers have been insufficient to defeat Ukraine' armed forces. So now an increasing number of Russian troops are intervening directly in fighting on Ukrainian territory.
"Russia has also sent its newest air defense systems including the SA-22 into eastern Ukraine & is now directly involved in the fighting," he said.
Fighting in the east erupted in April, a month after Russia annexed Ukraine's Crimean peninsula in response to the toppling of a pro-Moscow president in Kiev.
A U.N. report this week said more than 2,200 people had been killed, not including the 298 who died when a Malaysian airliner was shot down over rebel-held territory in July.
Ukraine crisis graphic http://link.reuters.com/map78v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Additional reporting by Maria Tsvetkova, Anton Zverev, Gabriela Baczynska, Vladimir Soldatkin and Thomas Grove, Adrian Croft, Lina Kushch, Andreas Rinke and Alessandra Prentice, Steve Holland, Roberta Rampton and Louis Charbonneau; Writing by Mark Trevelyan and Peter Cooney; Editing by Will Waterman, David Stamp and Ken Wills)