* Kiev says Russia pursuing "direct military aggression"
* EU ministers discuss new sanctions on Moscow
* Ukraine president hopeful for peace progress in coming days
By Richard Balmforth and Adrian Croft
KIEV/BRUSSELS, Aug 30 (Reuters) - Ukraine said on Saturday Russian tanks had flattened a small border town and pro-Russian rebels had made fresh gains in its east, as EU leaders signalled they were ready to prepare more sanctions on Moscow over the crisis.
Ukrainian President Petro Poroshenko, speaking ahead of an EU summit in Brussels, said he was still holding out hope for a political solution but told journalists there were now thousands of foreign troops and hundreds of foreign tanks in his country.
Russia has repeatedly dismissed accusations from Kiev and Western powers that it has sent soldiers across the border into its neighbour, or supported pro-Russian rebels fighting a five-month-old separatist war in Ukraine's east.
But Ukraine military spokesman Andriy Lysenko told journalists in Kiev Russian tanks had entered the small Ukrainian town of Novosvitlivka on the border with Russia and fired on every house.
"We have information that virtually every house has been destroyed," Lysenko said, without giving details on when the reported attack took place. Ukraine's daily military briefings typically cover the previous 24 hours.
"Direct military aggression by the Russian Federation in the east of Ukraine is continuing. The Russians are continuing to send military equipment and 'mercenaries'," Ukraine's defence and security council said in a separate Twitter post.
A senior U.N. human rights official said on Friday nearly 2,600 civilians, Ukrainian government forces and rebels have been killed in a conflict which has led to the biggest Russia-West crisis since the Cold War.
The crisis started when Ukraine's Moscow-backed president was ousted by street protests in February after he ditched a pact with the EU that would have moved the ex-Soviet republic firmly towards Europe and away from Russia.
Russia denounced the pro-Western leadership that took over as "a fascist junta" and went on to annex Ukraine's Crimea peninsula. Pro-Russian separatists then rebelled in Ukraine's mainly Russian-speaking east in April, setting up 'people's republics' and declaring they wanted to join Russia.
Lysenko said the rebels had made new gains just east of the border city of Luhansk, one of the principal rebel strongholds since the conflict erupted.
Last week pro-Russian rebels opened a new front in a separate, coastal territory along the Sea of Azov, pushed Ukrainian troops out of the town of Novoazovsk and are now threatening the strategic port city of Mariupol.
Kiev and Western countries say the rebel gains were the result of the arrival of armoured columns of Russian troops, sent by Russian President Vladimir Putin to prop up a separatist rebellion that would otherwise have been near collapse.
"DOORS OPEN TO PEACE"
There was no immediate fresh comment from Russia on Saturday. Putin on Friday compared Kiev's drive to regain control of its rebellious eastern cities to the Nazi invasion of the Soviet Union in World War Two.
He announced that rebels had succeeded in halting it, and proposed that they now permit surrounded Ukrainian troops to retreat.
European Commission President Jose Manuel Barroso said on Saturday the EU was prepared to toughen sanctions against Russia but also that it wanted a political deal to end the confrontation.
At a news conference in Brussels with Poroshenko, Barroso said: "We are ready to take very strong and clear measures but we are keeping our doors open to a political solution."
He described any tightening of sanctions as intended not to escalate the crisis but to push Moscow to negotiate and he stressed that the EU did not want confrontation - "it makes no sense to have ... a new Cold War" - and said that would be "detrimental to all of Europe".
Poroshenko, echoing comments by EU officials, said he expected a summit of EU leaders later on Saturday to make a formal request to the EU's executive Commission to draw up new sanctions measures that could be implemented if necessary.
The Ukrainian president said he expected to see progress toward peace in the east of the country in the coming days, without going into details.
"We are waiting that in the very next days, starting from Monday, we can demonstrate the real progress in the peace negotiations ... Why? Because we are too close to the border where from it would be no return to the peace plan."
In Kiev, Ukraine's Interior Minister Arsen Avakov said a group of pro-Ukrainian fighters had broken out of encirclement by pro-Russian rebels near Donetsk early on Saturday, though other reports suggested many remained trapped.
Defence Minister Valery Heletey also ordered a clampdown on information coming out of Ilovaysk, a town to the east of Donetsk.
Indicating government forces were being pulled back from the area, Heletey said on his Facebook page: "As soon as the danger for Ukrainian units has passed, all open information for the current period relating to the withdrawal of forces from Ilovaysk will be published." (Additional reporting by Pavel Polityuk in Kiev; Writing by Richard Balmforth' Editing by Andrew Heavens)