Ukrainian forces entered the eastern stronghold of Lyman on Saturday after encircling thousands of Russian troops, Kyiv said, in a battlefield rebuttal to the Kremlin a day after it proclaimed a swathe of its territory part of Russia.

The capture of Lyman would be a major setback for Moscow after President Vladimir Putin proclaimed the annexation of the Donetsk region, along with three other regions, at a ceremony on Friday that was condemned by Kyiv and the West as a farce.

"We're already in Lyman, but there are battles," Serhii Cherevatyi, spokesperson for Ukraine's eastern forces, said.

Two grinning Ukrainian soldiers taped the yellow-and-blue national flag on to the "Lyman" welcome sign at the town's entrance in Donetsk region's north, a video posted by the president's chief of staff showed.

"Oct. 1. We're unfurling our state flag and establishing it on our land. Lyman will be Ukraine," one of the soldiers said, standing on the bonnet of a military vehicle.

Russia had 5,000 to 5,500 troops at Lyman but the number of encircled troops could be lower because of casualties, Mr Cherevatyi said.

"The Russian grouping in the area of Lyman is surrounded," the spokesperson, he said on television.

The Russian Defence Ministry did not immediately respond to a request for comment.

Russia's last operational update was on Friday evening. On Saturday, the ministry's Telegram channel published a series of congratulatory messages, including one from Putin, to mark an army holiday, Ground Forces Day.

Russian military bloggers said the loss of the town would be a serious setback and that it was obvious Moscow had taken the decision to abandon the town and pull out its forces.

Neither side's battlefield assertions could be independently verified.

Logistics Hub

Russia has used Lyman as a logistics and transport hub for its operations in the north of the Donetsk region. Its fall would be Ukraine's biggest battlefield gain since a lightning counteroffensive in the northeastern Kharkiv region last month.

The Ukrainian military spokesperson said the capture of Lyman would allow Kyiv to advance into the Luhansk region, whose full capture Moscow announced at the beginning of July after weeks of slow, grinding advances.

"Lyman is important because it is the next step towards the liberation of the Ukrainian Donbas. It is an opportunity to go further to Kreminna and Sievierodonetsk, and it is psychologically very important," he said.

Donetsk and Luhansk regions together make up the wider Donbas region that has been a major focus for Russia since soon after the start of Moscow's invasion on Feb. 24 in what it called a "special military operation" to demilitarise its neighbour.

Vladimir Putin proclaimed the Donbas regions of Donetsk and Luhansk and the southern regions of Kherson and Zaporizhzhia to be Russian land in Friday's ceremony - a swathe of territory equal to about 18% of Ukraine's total surface land area.

Ukraine and its Western allies branded Russia's move as illegal. Kyiv vowed to continue liberating its land of Russian forces and said it would not hold peace talks with Moscow while Vladimir Putin remained as president.

Retired U.S. General Ben Hodges, a former commander of the U.S. Army in Europe, said a Russian defeat in Lyman after Vladimir Putin's declaration would be a major political and military embarrassment for the Russian leader.

"This puts in bright lights that his claim is illegitimate and cannot be enforced," he said.

It remained to be seen how Ukrainian commanders would exploit the rout, he said, adding it likely would further erode the morale of Moscow's troops holding other Ukrainian territory.

Mr Cherevatyi said the operation around Lyman was still under way and Russian troops were mounting unsuccessful attempts to break out of the encirclement.

"Some are surrendering, they have a lot of killed and wounded, but the operation is not yet over," he said.

Ukraine's exiled governor of Luhansk said Russian forces had asked for a safe exit out of the encirclement, but Ukraine rejected the request.

The Ukrainian General Staff told Reuters it had no such information.