(Repeats Sunday story, text unchanged)
* Pro-Russian Rebels squeezed mainly into two cities
* Ukrainian army says it will not bombard Donetsk
* Residents stock up on staples, seek refuge
By Aleksandar Vasovic
DONETSK, Ukraine, Aug 3 (Reuters) - Although the streets outside are nearly empty, business has been brisk at Oksana Vsevolodova's grocery store Donetsk as residents prepare for what could be a long siege.
People in the east Ukraine city are stocking up flour, canned food, cooking oil, instant coffee, candles and batteries as government forces tighten the noose around pro-Russian separatists occupying the city.
"I've done the same as my customers. I store everything in the cellar," Vsevolodova said. "I've also bought three folding beds for myself, my husband and our child. We can't afford to leave the city, we're not that rich."
After nearly four months of occupation and violence, the most popular phrase in the city has become: "Live until tomorrow."
The rebels, who took over the Donetsk administration's offices and erected barricades around them in mid-April, are still in charge of the sprawling city, the main hub of the Donbass coal-mining region.
But many of the nearly 1 million residents have fled since the Ukrainian army forced rebels out of most towns they had occupied and squeezed them into two main strongholds, Donetsk and nearby Luhansk.
Luhansk, a city of 400,000 before the conflict, is now all but encircled and residents spend much of the time in their cellars because of shelling. Electricity was off for most of the past few days and the last food supply route has been cut.
Donetsk is harder to encircle because it is much bigger, but highways out are guarded by rebel roadblocks and surface-to-surface rockets fired by pro-government forces have rained down on residential tower blocks in the city centre. Several civilians have been killed in shelling in the past two weeks.
The rebels say they will fight to the end, leaving the pro-Western leadership in Kiev facing a dilemma - how to force them out without a bloodbath.
A storm of the city by crack troops appears to have been ruled out: Ukraine has little or no expertise in such missions and it would risk heavy civilian casualties and army losses.
A siege is the most likely option, with the possibility of an escape corridor for the separatist fighters in the hope they may flee - to Russia, if Moscow will take them, despite denying it arms them. Nearly all of the main separatist leaders and an unknown number of the fighters are from Russia.
NO MASS BOMBARDMENT
"The tactic of the Ukrainian armed forces, National Guard and Border Guard Service rules out massive bombardment of populated areas," Andriy Lysenko, a spokesman for Kiev's military operation in the east, told a recent news conference.
"We will use only ground forces there which will free the city street by street, block by block."
Ukrainian officials say the army does not fire at residential areas and denies it will use the air force against the big cities. Reuters journalists have seen shells hit residential buildings in central Donetsk, though it was impossible to verify whether fighters were present.
The army has gained the upper hand in the conflict since businessman Petro Poroshenko was elected president in May, three months after his pro-Russian predecessor was ousted following protests over a political about-turn towards Moscow.
The government has intensified its offensive since a Malaysian airliner was downed in rebel-held territory on July 17, killing 298 people. Kiev and the United States say the separatists shot it down with a missile provided by Russia. Moscow and the rebels blame the disaster on Kiev.
Ukrainian officials say there are about 12,000 rebel fighters in the two cities, but some residents say the number could be much higher. It is hard to say how long they can hold out without reinforcements.
"It could last for a very long time or it could all collapse overnight. The decision is in Moscow," said a Western official, referring to the West's allegations - denied by Moscow - that Russia is arming the rebels and sending in mercenary fighters.
The United Nations said 1,129 people were killed and nearly 3,500 wounded in east Ukraine between mid-April and July 26. Tens of thousands have been forced to leave their homes.
But the separatists appear intent on showing they will stay for a long time in the self-proclaimed "people's republics" of Donetsk and Luhansk, known by Russian acronyms DNR and LNR.
In Donetsk, where any government loyalist police have long since been pushed out or defected, rebels have taken down barricades that once protected them in the city administration building. The cobbled square in front has been fixed up.
The separatists are armed with much more powerful weapons than when the conflict began, in some areas using rocket launchers, self-propelled howitzers, armoured vehicles and tanks. But several of their counter-attacks have failed to push back government troops at any of main points on the frontline.
For now the people who remain in Donetsk are getting by. Some parts of the city, mainly the suburbs near the outlying airport, have no electricity and are shelled daily. But food and fuel is reaching areas not directly affected by fighting.
"It's more and more difficult to bring in fresh goods, but they're still coming in," said Vsevolodova, who had goods in storage before the conflict so can keep her shop open.
Even just a few weeks ago, residents would take leisurely strolls in the centre, downtown cafes and restaurants did a steady business, and children were often out playing in parks.
These days the streets are mostly deserted, though there are often queues of people at the railway station trying to leave.
A pensioner at the station who gave her name only as Tatyana burst into tears as she explained she was buying a ticket to a city just across the border in Russia because her home in the nearby town of Shakhtarsk had been hit by a shell.
"There's almost nothing left of my house. I was evacuated by DNR people. My son is fighting for them," she said. "My daughter and I are going to Belgorod. We have no place to come back to."
Some residents are sheltering friends or relatives who fled the fighting in villages and town near the city as the army advances on Donetsk.
"Our relatives are staying with us. The windows of their flat were blown out, so they rang and asked to stay with us," said Alla Podolskaya, who works in advertising and lives on the outskirts of Donetsk.
"We've put two tents up in our courtyard and two more people can sleep in our car. We're expecting more people to come to us from the 'hot spots'."
Her local butcher has almost no meat left and plans to shut his shop. Many homes and other shops in the area have already been abandoned by people who have fled the city or moved closer to the centre in the hope that it is safer.
In the centre a struggling sports shop announced a sale, slashing prices by up to 80 percent to try to bring some cash in. Many banks are not working, making it impossible for most residents to get money, and a lot of the supermarkets are shut. Other shops open for only a few hours each day.
A night curfew has been declared, starting at 10 pm, but few residents are out after late afternoon anyway.
The degree of local support for the rebels is unclear. Some have sympathy with their cause but others are unsettled by the lawlessness and presence of armed men in combat fatigues, some of whom hide their faces behind ski masks.
Banners hung across the city copied from Soviet World War Two-era posters proclaim support for the DNR. Graffiti and flags hail "New Russia" - a term once used by Russian President Vladimir Putin to refer to eastern and southern Ukraine and now adopted by the rebels as the name for their project.
Rebel commander Igor Girkin, a Muscovite whose moustachioed face appears on a banner modelled on the war film "300" that hangs above a central street, has declared a "state of siege".
The DNR says this gives his fighters the right to confiscate cars, construction materials, food, medical supplies and phones. Residents murmur that it gives a green light to theft.
Reports of summary executions in cities Girkin's men previously occupied have made some residents as concerned about the threat posed by the separatists as by the army shelling.
While many people are uncomfortable discussing politics, they describe a deep bond with each other and the besieged city.
"When you go out in the empty city to meet people, you feel the same thing, you feel a sense of kinship. We have something in common, one problem, one goal - to survive," Margarita Grigoryants, a blogger, told Reuters. (Additional reporting by Lina Kushch, Maria Tsvetkova in Donetsk and pavel Polityuk in Kiev; Editing by Timothy Heritage and Peter Graff)