The International Monetary Fund has approved a $17 billion aid deal for the beleaguered Ukrainian economy as Kiev's armed forces went on "full combat alert" against a possible Russian invasion.

Pro-Kremlin insurgents tightened their grip on the increasingly chaotic east of the country, storming the regional police building and town hall in the city of Gorlivka, local officials told AFP, adding to more than a dozen locations already under their control.

IMF chief Christine Lagarde, speaking in Washington on Wednesday after her executive board approved the huge aid plan, said "urgent action was necessary".

"Deep-seated vulnerabilities together with political shock have led to a major crisis in Ukraine," she warned.

"The economy is in recession, fiscal balances have deteriorated, and the financial sector is under significant stress."

Ukraine faces deep fiscal problems, and President Vladimir Putin has threatened to cut off vital gas supplies if a $3.5-billion (2.5-billion-euro) bill is not quickly paid.

The loan money will be released over two years, with a first tranche of $3.2 billion available immediately.

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