putin ukraine
Russia's President Vladimir Putin speaks during a rally at Red Square in Moscow. Crimea's Prime Minister Sergei Aksyonov and parliamentary speaker Vladimir Konstantinov are seen in the background.Reuters

Russian President Vladimir Putin has demanded that Ukraine remove its troops from the eastern provinces of the country where pro-Russian separatists continue to gain control.

Putin made the demand during a phone conversation with German Chancellor Angela Merkel about the release of seven international observers, four of whom are German nationals, who were kidnapped by pro-Russian militants in the city of Slaviansk last week.

The former KGB agent said that "it was imperative today to withdraw all military units from the southeastern regions" of Ukraine, and advised that a "broad national dialogue" about reforms to Ukraine's constitution was necessary.

Merkel called her Russian counterpart as Ukraine's interim president Olexander Turchynov said that he no longer had control of the eastern regions of the country.

"I want to say honestly that today the power structures are incapable of operatively taking control of the situation in the Donetsk and Luhansk regions," said Turchynov.

Tensions have continued to escalate as pro-Russian protesters stormed the general prosecutor's office in the regional capital of Donetsk while a crowd amassed outside Donetsk's main police station demanding the release of pro-Russian activists.

The Russian Foreign Ministry warned in a statement that, if the Ukrainian government continued with military operations in the eastern regions, it "could lead to disastrous consequences."

"We are calling on Kiev, as well as the US and the EU indulging it... not to commit criminal mistakes and to soberly assess the gravity of possible consequences of using force against the Ukrainian people," the statement read.

Merkel is set to travel to meet US President Barack Obama on Friday in Washington for talks on the security situation in eastern Europe where Nato has dispatched troops and fighter jets.