* Bus convoy was taking refugees from rebel-held city of Luhansk
* Government forces report more successes in anti-rebel drive
* Rebels introduce death penalty for treason, espionage
* Rout of rebels would pose risky choices for Putin (Adds detail)
By Richard Balmforth and Stephen Brown
KIEV/BERLIN, Aug 18 (Reuters) - Ukraine accused pro-Russian rebels on Monday of hitting a refugee convoy of buses with rocket fire near the eastern city of Luhansk, killing people trapped in the burning vehicles, but the separatists denied responsibility.
Ukrainian military spokesmen said the bus convoy had been in an area of fierce fighting between government forces and the separatists. It had come under fire from rebel Grad and mortar launchers, they said, causing an unknown number of casualties.
"A powerful artillery strike hit a refugee convoy near the area of Khryashchuvatye and Novosvitlivka. The force of the blow on the convoy was so strong that people were burned alive in the vehicles - they weren't able to get themselves out," military spokesman Anatoly Proshin told Ukrainian news channel 112.ua.
Describing the attack as a "bloody crime", another military spokesman, Andriy Lysenko, said: "A lot of people have been killed including women and children. The number of the dead is being established."
A rebel leader denied his forces had the military capability to conduct such an attack, and accused Kiev forces of regularly attacking the area and also using Russian-made Grad missiles.
"The Ukrainians themselves have bombed the road constantly with airplanes and Grads. It seems they've now killed more civilians like they've been doing for months now. We don't have the ability to send Grads into that territory," said Andrei Purgin, deputy prime minister of the self-proclaimed Donetsk People's Republic.
Another rebel spokesman denied any civilian convoy had been struck, challenging the Kiev authorities to produce evidence.
REBELS UNDER PRESSURE
The Kiev military reported new successes overnight, building on a weekend breakthrough when troops raised the national flag in Luhansk, a city held by pro-Russian separatists since fighting began in April.
Troops blockaded or recaptured rebel-held positions after international talks in Berlin failed to reach agreement on a ceasefire. Nine soldiers were killed.
Western sanctions against Moscow have failed to stem what NATO says is a steady supply of military equipment and men sent from Russia to help the rebels. Russia denies sending support, saying the rebels have seized equipment from the Ukrainians.
Russian Foreign Minister Sergei Lavrov said all issues around a humanitarian convoy sent by Moscow to relieve needy areas of eastern Ukraine had been resolved but no progress had been made in his talks in Berlin on Sunday with the Ukrainian, German and French foreign ministers on a ceasefire or a political solution.
Russia says it would like a ceasefire to allow aid to get to people trapped by the fighting. A 280-truck convoy sent by Russia and carrying tonnes of humanitarian aid has been stalled at the Ukrainian border since last week, as Kiev has insisted on formalities so it can be properly distributed by the Red Cross.
Ukrainian Foreign Minister Pavlo Klimkin, who was at the Berlin talks, said: "Russia must close the border and stop shelling. If you have mercenaries and weaponry coming through the border from the Russian federation how can you reach a ceasefire?
"It's not about terminology or conditions. It's about substance. If you want peace, you have to use peaceful means not the means of war," Klimkin said, according to a ministry Twitter post.
PROBLEMS IN THE RANKS
In a further sign that the rebel leadership may be facing deep problems in its ranks, it said it was setting up military tribunals and bringing in the death penalty for a string of offences including treason, espionage, attempts on the lives of the leadership and sabotage.
"Introducing the death penalty is not revenge, it is the highest degree of social protection," the rebels' website quoted a senior rebel leader, Vladimir Antyufeyev, as saying.
The possibility that the rebels might be facing a rout presents Russian President Vladimir Putin, who boosted their ambitions by speaking of the creation of a "New Russia" in eastern Ukraine, with a difficult choice.
If he remains silent and allows their defeat, he risks losing face before the "hawks" at home and the Russian people who have largely applauded Moscow's annexation of Crimea in March. But by trying to maintain pressure on Kiev's pro-western leadership through further support for the rebels, he risks wider economic sanctions from the United States and European Union.
Western sanctions on Moscow have targeted its financial and energy sectors as well as dozens of Russians close to Putin, and Russia has retaliated by banning a wide range of U.S. and EU food imports.
Vedomosti daily newspaper said on Monday that Moscow might step up its action to include a ban on imports of cars, among other things, if the United States and the EU take additional action against it.
HEAVY DEATH TOLL
The separatist conflict erupted after Russia seized the Crimean peninsula in March following the ousting of a Moscow-backed Ukrainian president. Separatists occupied key buildings in towns across the Russian-speaking east, declaring "people's republics" and saying they wanted to join Russia.
The United Nations said this month that an estimated 2,086 people, including civilians and combatants, had been killed in the conflict. The death toll has nearly doubled since the end of July, when Ukrainian forces stepped up their offensive as they gained more ground against the rebels.
A military spokesman in Kiev said government forces had pressed the separatists in overnight fighting, encircling the rebel-held town of Horlivka between Luhansk and Donetsk, and taking control of smaller settlements in eastern Ukraine.
The military said it suspected the rebels had fired back with a powerful Russian-made Uragan missile system southeast of Donetsk near the village of Novokaterinivka, their first use of the weapon. "The Russian mercenaries are in panic trying to get out of these places," it said. The rebels made no immediate comment.
The separatist news outlet Novorossiya said Ukrainian forces had shelled the village of Khryashchevatoe overnight with mortars to tighten the circle round Luhansk.
Moscow says the Ukrainian government, with backing from its Western allies, is subjecting thousands of Russian-speakers in eastern Ukraine who reject Kiev's rule to artillery bombardments and shortages of water and power.
In Donetsk, some people said their water had been shut off as of 9 p.m. local time (1800 GMT) the night before, and early on Monday local shops had already sold out of large bottles of water. "There's been no water since last night," said Maria, 23, but others in the city said water was still flowing.
(Additional reporting by Natalia Zinets and Alessandra Prentice in Kiev, Thomas Grove in Donetsk and Alissa de Carbonnel in Moscow; Writing by Richard Balmforth; editing by David Stamp and Philippa Fletcher)
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