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Ukraine extends truce with rebels after sealing EU pact

Ukraine's new leader extended a tenuous truce with pro-Moscow rebels after signing a landmark EU deal on closer relations and possible future membership that drew immediate threats of retaliation by Russia.

KIEV: Ukraine's new leader extended a tenuous truce with pro-Moscow rebels on Saturday after signing a landmark European Union (EU) deal on closer relations and possible future membership that drew immediate threats of retaliation by Russia.

President Petro Poroshenko's decision to prolong the ceasefire agreement until 1900 GMT on Monday came after three hours of urgent consultation with his top defence official that began on his return from a historic summit in Brussels with the original one-week truce having already lapsed.

Separatist commanders in Ukraine's heavily Russified eastern rustbelt had earlier said they also agreed to halt fire for 72 hours to give the first indirect contacts on ending nearly 11 weeks of fighting a chance to work.

Poroshenko had earlier hailed his signing in Brussels of the EU Association Agreement - a 1,200-page document defining the political and trade terms under which Kiev will slip from the Kremlin's embrace - as a turning point for a country that straddles a geopolitical fault line between Europe and Russia.

The deal also bursts Russian President Vladimir Putin's dream of enlisting Kiev in a Moscow-led alliance that could rival the European Union and NATO.

The Kremlin immediately vowed to take "all the necessary measures" against Ukraine.

But Poroshenko argued in Brussels that the deal offered Ukraine "an absolutely new perspective" and "the opportunity to modernise".

"It is a historic day, the most important day since independence," he declared.

US Secretary of State John Kerry hailed the political association and free trade agreements - also sealed on Friday with ex-Soviet Moldova and Georgia - as a "major step" to building "a Europe whole, free and at peace."

"I think it is noteworthy that exactly what President Putin was trying to prevent from his interfering in Ukraine has now happened," State Department spokeswoman Marie Harf added.

Yet Poroshenko celebration of Ukraine's historic shift westward came with his army reporting the death of five more soldiers in attacks by rebels who do not appear to care about decisions taken by the formal separatist leaders.

Putin strongly denies exerting control over the fighters and is yet to address in public reports from Kiev and Washington of rocket launchers and even tanks crossing the Russian border into the conflict zone.

But the Kremlin chief is also facing the threat of imminent economic sanctions should he fail to show that he is backing Poroshenko's bid to end nearly two months of fighting that have claimed more than 440 lives.

EU leaders chose not to make an act on sanctions in Brussels and instead gave Russia until Monday to vividly demonstrate a more conciliatory approach toward Ukraine.

A statement adopted on Friday underlined the leaders' "commitment to reconvene at any time for further significant restrictive measures".

But analysts said the European Union will be pushing the two sides to pursue diplomacy for as long as possibly in order to avoid jeopardising their strong energy and financial ties with Russia.

"While the EU is prepared to impose sectorial sanctions, this will only be at a later stage, most likely September/October, after diplomacy has been given more time," the Eurasia Group political risk consultancy said in a report.

However, Russia's economy has already suffered from a massive outflow of capital from investors jittery about the impact of threatened restrictions being imposed on the country's banks and export sectors.

Moody's on Friday cut Russia's rating outlook to "negative" due to growing "geopolitical risk".

The ousted pro-Russian president had ditched the EU pact's planned signing in November out of intense and political pressure from the Kremlin that included the threat of Ukraine's good effectively losing access to the Russian market.

The European Union argued in the free trade deal's defence that it would boost Ukraine's exports to the 28-nation bloc by US$1.35 billion (1.0 billion euros) a year and save the nation of 46 million roughly half that amount in revoked customs duties.

Russia now warns it will have no choice but to slap punishing trade restrictions on Ukraine after already nearly doubling its gas price - a step Kiev disputed and that led to a cut in its supplies this month.

The state-run gas giant Gazprom also warned central European countries negotiating emergency "reverse flow" deliveries to Ukraine that it would limit their own supplies should such shipments be made.

Gazprom says its contracts prohibit European clients from selling its own gas to other countries without the Russian government's consent.

Yet some analysts still believe that Ukraine's economy - already expected to shrink by an additional five percent this year - should eventually benefit from the adoption of European business and production standards that could make its goods competitive again.

"The agreement... should act as an anchor for much-needed economic and political reforms," London's Capital Economics consultancy said in a research note.

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