* Kiev sees poll as most important since 1991 independence
* Separatism rages in east, Moscow looks askance at poll
* Separatists, pro-Ukraine militia clash, two killed
* Russia's Putin says situation in Ukraine is civil war (Adds details on Ukrainian militia group, paragraph 6)
By Richard Balmforth and Sabina Zawadzki
KIEV/KARLOVKA, Ukraine, May 23 (Reuters) - Armed pro-Russian separatists and a Ukrainian militia group clashed in the east of Ukraine on Friday, leaving at least two dead and heightening tension before a presidential election called to draw a line under six months of bloody upheaval.
Kiev's pro-Western leaders hope Sunday's poll will stabilise the former Soviet republic after street protests toppled Moscow-backed president Viktor Yanukovich and pro-Russian separatists responded by seizing Crimea and parts of eastern Ukraine.
European leaders will consider steps against Russia on Tuesday if they decide Moscow has hampered the election, ranging from restrictions on luxury goods imports to an oil and gas ban, although some are wary due to close trade ties.
The Ukrainian authorities have promised a suspension of anti-separatist operations on the day of the election, billed as the most important in 23 years of independence from Moscow, but Friday's clash suggested violence may mar the event.
A Reuters correspondent saw two dead bodies after the three- hour fire-fight in the morning between Ukrainian self-defence fighters and separatists manning a checkpoint in a rural location west of the big industrial city of Donetsk.
The pro-Kiev fighters issued a Facebook statement late in the day saying four of their men were killed and nine wounded. Allied to Ukrainian billionaire Igor Kolomoisky, they are at the forefront of Kiev's efforts to prevent the country splitting.
"We are determined that honest and transparent elections will take place," interim Prime Minister Arseny Yatseniuk declared in talks with two European Union foreign ministers as the bloc's foreign policy chief Catherine Ashton voiced support for Kiev and its election.
Yatseniuk added that, despite separatist plans to disrupt the poll in eastern areas they control, he believed the majority of people there opposed the "terrorists" and condemned their actions.
But Russia's President Vladimir Putin, speaking in St Petersburg, said Ukraine was already in effect in the grip of civil war. "A civil war is raging through Ukraine. But why are we the ones who are being blamed for this?" he asked at an international business forum.
After Yanukovich's overthrow in February, Russia annexed Ukraine's Crimea region and stationed thousands of troops in combat readiness near the border with Ukraine as armed pro-Russian rebels took over strategic buildings in the east.
It looks askance at Kiev's leaders and their pro-Europe policies, which could take the former Soviet republic out of Moscow's orbit and denies Kiev's charges that it has fomented the separatist rebellions in the Russian-speaking eastern areas.
On Friday, Moscow said it would pull back all forces from its border with Ukraine "within a few days", a move that, if carried out, could ease tensions around the election.
BIG OBSERVER TEAM
While Germany's Angela Merkel appealed to Russia to accept the Organization for Security and Cooperation in Europe's (OSCE) verdict on the vote, Putin sent mixed messages, saying he would work with the winner and wanted better ties with the West but fiercely criticising U.S. policy on Ukraine.
The OSCE watchdog has sent a team of more than 1,000 observers to monitor an election in which Ukraine's leaders say they expect a huge turnout that will offset the loss of voters in annexed Crimea and separatist-controlled parts of the east.
The man tipped to win, confectionery magnate Petro Poroshenko, has urged voters to hand him an outright victory, suggesting that Ukraine's deteriorating security situation might otherwise derail the election before a second round can be held.
If no candidate wins more than 50 percent of the vote on Sunday, a run-off will be held on June 15, in all likelihood pitting Poroshenko against ex-prime minister Yulia Tymoshenko.
The fierce firefight in the eastern Ukraine settlement of Karlovka underlined the fragility of the security situation.
"The main threat to the elections is the illegal carrying of weapons and the moving around of people. We do not see an end to this illegal activity," state security chief Valentyn Nalivaychenko told journalists.
Underlining the logistical challenges of staging this poll, Konstantin Hivrenko of Ukraine's Central Election Commission said voters from five of 12 electoral districts in Donetsk now blocked by separatists would instead be able to travel to the city airport to cast their ballots as security there was good.
Friday's clash, which came a day after at least 13 Ukrainian servicemen were killed in another fire-fight, did not involve the army but instead two among several armed groups operating under various flags in the east.
Pro-Russian separatists, calling themselves the "Patriotic forces of Donbass", were manning a checkpoint, one of many set up by the rebels who have proclaimed two "people's republics".
They clashed with self-defence fighters from a pro-Ukrainian militia called the Donbass battalion.
It was unclear who attacked first. But the fire-fight, in which the pro-Ukrainian militia said separatists used grenade launchers and machine guns, lasted more than three hours, local residents said.
A Reuters correspondent who visited the scene soon after the clash saw two dead men, both wearing black battle fatigues. One lay on his back by the roadside, the other lay some way away near a burned-out warehouse. He had a gunshot wound in his head.
Another fighter, dressed also in battle fatigues, was clenching his fists in pain as paramedics tended his leg wounds.
"A small unit was on the road doing reconnaissance and it ran into a roadblock where there were many more separatists than us. They opened sniper fire, they had armoured personnel carriers and machineguns," said Semen Semenchenko, commander of the pro-Ukrainian militia force.
He said the separatists included at least 15 Chechen fighters from Russia's formerly rebel region of Chechnya.
But the separatists said the pro-Ukrainian force, backed by members of a Ukrainian ultra-nationalist group, opened fire first. Locals, who mostly stayed indoors once the shooting began in the early morning, had contrasting views of who was to blame.
A 52-year-old woman who gave only her first name, Valentina, laid the blame at the door of Kiev, which is using the Ukrainian army in an "anti-terrorist operation" against the separatists.
"Why do they (the Kiev authorities) do this? Why is Europe silent? Everybody was living normally but now everyone is interfering".
Asked if she would vote on Sunday, Valentina said: "Who should I vote for - for people who are killing us and shooting at us? The answer is No!".
Alexei, in nearby Krasnomaisk, voiced an opposite view as he brought petrol to pro-Ukrainian self-defence fighters.
"All this is because these idiot separatists want to undermine the elections. But we will vote anyway. Out of 25 kids in my son's school, only seven are for Ukraine, the others call my son 'Banderovets'," he said, using a pejorative label for Ukrainian ultra-nationalists.
(Additional reporting by Gabriela Baczynska in Krasnomaisk; Writing by Richard Balmforth; Editing by Gareth Jones and Philippa Fletcher)
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