By Richard Balmforth
KIEV, July 8 (Reuters) - Ukraine's government signaled its intention to press on with its campaign against pro-Russian rebels on Tuesday and the militants, regrouping after losing their stronghold, said they were preparing to fight back.
President Petro Poroshenko, drawing confidence from the fall of the rebel bastion of Slaviansk at the weekend, named a new chief of military operations in the east following his appointment of an aggressive new defense minister who ruled out negotiations until the separatists lay down their arms.
One rebel leader played down the loss of Slaviansk as a military expedient and said the hundreds of fighters who were able to move from the town to the regional capital Donetsk were preparing a command structure to defend that city and hit back:
"We're not preparing ourselves for a siege. We are preparing ourselves for action," Alexander Borodai, prime minister of the self-proclaimed Donetsk People's Republic, told a Russian online newspaper during a visit to the Russian capital.
Sporadic shooting was heard from various parts of Donetsk overnight though no specific incidents were reported. But in Luhansk, a city on the border with Russia where rebels also control key buildings, two people in a minibus were killed by a shell that exploded nearby, a municipal official said.
"There is an exchange of fire among the separatists. They are shooting at each other," Iryna Verigina told a Ukrainian television station by telephone from Luhansk.
Poroshenko, installed in office just a month ago, named Vasyl Grytsak to head the "anti-terrorist center", making him operational chief in the drive to crush the rebels.
The move continued his shake-up of the military and security leadership in which he has appointed a hardline defense minister to bring fresh vigor to the fight against the insurgency.
Grytsak, a 53-year-old police lieutenant-general and 20-year veteran of the state security apparatus, replaces Vasyl Krutov, who had headed the "anti-terrorist center" since mid-April.
Despite some successes against the rebels, Krutov and other security officials have come under criticism for the patchy performance of the armed forces and big military losses including the downing by the rebels of an Ilyushin Il-76 plane in June with the deaths of more than 49 crew and servicemen.
FOCUS ON DONETSK
Pro-Russian rebels have been fighting government forces since April when they set up separatist republics in the Russian-speaking east after political upheaval in Kiev led to the ousting of a Moscow-backed president followed by Russia's annexation of Crimea.
They have brought down military helicopters and ambushed government forces on the ground in three months of fighting in which more than 200 Ukrainian troops have been killed, along with hundreds of civilians and rebels.
The fall of Slaviansk to government forces at the weekend has now swung the focus onto Donetsk, raising the question of how the Kiev military will go about breaking the resistance in a sprawling industrial city with a population of over 800,000.
Since hundreds of rebels flooded into the city at the weekend, armed men have been out on the streets, setting up new barricades and checkpoints and stopping pedestrians and motorists to run spot identity checks.
Borodai brushed off suggestions that Slaviansk had been a defeat, portraying it as a successful tactical withdrawal, though Kiev says the rebels sustained heavy losses.
He said Igor Strelkov, a Muscovite who commanded forces in Slaviansk, would take over as commander-in-chief for defending Donetsk. "A strict vertical command will be built through all armed units," Borodai told Russia's gazeta.ru. "Igor and I will be able to build a very effective, clear vertical."
Two bridges were destroyed on Monday after Ukraine's deputy security council chief said forces would blockade the cities Donetsk and Luhansk.
But Borodai scoffed at talk of Kiev having the resources to do this. "Any blockade of these two cities by the Ukrainian army is impossible. The Ukrainian army and its resources are not in a state to carry out a real blockade on even one Donetsk, so I don't see a real threat in that in the future," he said.
CEASEFIRE OFF AGENDA
In the worst crisis between the West and Russia since the Cold War, Moscow has denied accusations of fanning separatism in Ukraine's east and allowing military equipment and fighters to cross into Ukraine to support the separatists.
Though Borodai said in his interview that he had been in "consultations" in Russia, many rebels now reproach President Vladimir Putin's administration in Moscow, which is under threat from further Western sanctions, for giving them too little help.
The Ukrainian army's victory in Slaviansk has pushed peace talks involving separatist leaders off the agenda. A meeting of an informal "contact group" involving envoys from Kiev and Moscow had been planned for the weekend, under an agreement in Berlin last week, to discuss conditions for a truce.
The Organization for Security and Cooperation in Europe website said "high representatives" from Ukraine, Russia and the OSCE did in fact meet in Kiev on Sunday, though separatist leaders did not appear to have attended.
The group had been given the task of working out the basis for an effective ceasefire observed by both sides. But the new defense minister, Valery Heletey, in remarks reported on Tuesday, said there could be no fresh talk of a ceasefire until the rebels had laid down their arms.
"The president of Ukraine was categoric on this," he was quoted as saying by his ministry. "Now negotiations can be possible only after the fighters have definitively surrendered their arms." (Additional reporting by Thomas Grove and Natalia Zinets in Kiev and Maria Tsvetkova in Donetsk; Editing by Alastair Macdonald)