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Ukraine said on Wednesday it was redeploying troops in the east because of fears that separatists will launch a new military offensive, despite Russia's denials it has sent troops to reinforce the rebels.

A ceasefire agreed by the pro-Russian rebels and government forces more than two months ago is now all but dead, and Western fears of a return to all-out conflict are growing.

U.S. General Philip Breedlove, NATO Supreme Allied Commander Europe, said the alliance had seen Russian troops and tanks entering Ukraine in the past few days, confirming reports by international observers.

"There is no question any more about Russia's direct military involvement in Ukraine," Breedlove said in Bulgaria.

Read MoreRussian troops enter Ukraine: NATO commander

A Russian Defense Ministry official, General-Major Igor Konashenkov, said in Moscow that "there were and are no facts" behind such statements and Russia had given up paying attention to such accusations by NATO.

Ukrainian Defense Minister Stepan Poltorak left no doubt that Kiev was also no longer paying attention to Moscow's denials of providing the rebels with direct military support in the worst diplomatic standoff with the West since the Cold War.

"We are repositioning our armed forces to respond to the actions of the (rebel) fighters," Poltorak told a government meeting in Kiev. "My main task is to prepare for military action."

He gave no details of the troop movements.

Read MoreWorst east Ukraine shelling for month; ceasefire looks in doubt

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Ukraine redeploys troops

But Mitov said an even bigger problem is that Ukraine's financial markets are frozen. He estimated that $5 billion is needed to recapitalize the system.

Capital has been fleeing the country, causing Ukraine's currency, the Hryvnia, to fall 30 percent against the dollar last week alone. Ukraine's central bank has only $9.5 billion in reserves, but has big gas bills and import bills to pay in the coming year. The "financing gap," as it's called, stands at between $10 billion and $15 billion, Mitov said.

While agreeing that Ukraine's economic situation is problematic, Doug Rediker, the chairman of International Capital Strategies and a former member of the board of the IMF, said economic support for Ukraine from outside is likely.

"While the economic situation is clearly off track from expectations and hopes earlier this year, the political will to provide economic support for Ukraine is as firm or greater than it was earlier this year," Rediker said. "A key question: Will the political will to support Ukraine be reflected in financial commitments from governments and institutions to fill those gaps?"

Read MoreOPEC is feeling pain as oil slides to new, 4-year low

Mitov added that the country's dire situation has led to speculation that sovereign bond holders may be forced to take losses on money they lent to Ukraine. Mitov said that's unlikely, however, because it wouldn't help Ukraine's immediate financial problems.

Most of Ukraine's foreign debt repayments aren't due for another couple of years, but they have a "serious, acute, lack of cash now," he said.

"You can restructure as much as you want, this won't help in terms of cash flow," he said.

The UN Security Council announced it will meet at 2:30 p.m. Wednesday after NATO said that Russian combat troops entered Ukraine along with tanks, artillery and air defense systems.

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Ukraine economy in 'free fall,' banking group says

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