After speaking with Ukraine's Petro Poroshenko, Putin said their views on ending the violence were "very close" and Kiev and the rebels could reach an agreement by Friday, much-needed respite for the Ukrainian leader battling a crumbling economy.

But hopes of peace were clouded by Western concerns that the announcement was timed by the Kremlin to wrong-foot NATO on the eve of a summit that will discuss the crisis and to sow doubt in the European Union over imposing new sanctions against Moscow.

U.S. President Barack Obama said a ceasefire would succeed only if Moscow stopped sending troops to Ukraine.

New shelling of the rebel stronghold of Donetsk, sending plumes of gray smoke from near the city's airport, also undermined confidence in an end to hostilities.

"The parties reached mutual understanding on the steps that will facilitate the establishment of peace," Poroshenko's office said, amending an earlier statement that had spoken of agreement on a "permanent ceasefire".

Kremlin spokesman Dmitry Peskov said the leaders agreed on steps toward peace but not a ceasefire because Russia was not a party to the conflict, which has killed more than 2,600 people since April and caused the worst crisis in relations between Russia and the West since the Cold War.

Putin sounded upbeat in comments to reporters during a visit to Mongolia.

"Our views on the way to resolve the conflict, as it seemed to me, are very close," he said, outlining the seven steps he had put forward to secure a resolution to the crisis.

These steps, he suggested, should include a prisoner exchange and the creation of a humanitarian corridor for refugees and aid supplies. He called for Ukrainian troops to pull back and for rebels to cease offensive operations.

The West accuses Russia of arming the rebels and sending troops into Ukraine to turn the tide of fighting in the almost five month-old conflict. Moscow denies the charges.

"We have consistently supported the effort of president (Petro) Poroshenko of achieving a meaningful ceasefire that could lead to a political settlement," Obama said in the Estonian capital, Tallinn, during a visit intended to underline U.S. commitment to a frontline NATO state.

"So far it hasn't helped, either because Russia has not been serious about it or it's pretended that it's not controlling the separatists, and separatists, when they thought it was to their advantage, have not abided by the ceasefire."

CONFUSION

Although there was confusion over what had been agreed by Kiev and Moscow, the sides' statements pointed to a degree of progress that might yet influence EU leaders as they consider introducing new sanctions against Russia as early as Friday.

Sanctions were first imposed on Russia in the crisis after it annexed the Crimean peninsula in March following the removal of a Ukrainian president sympathetic to Moscow.

But in a contradictory signal on Wednesday, Moscow announced plans for huge military exercises this month by the strategic rocket forces responsible for its long-range nuclear weapons. It said the maneuvers in south-central Russia would involve 4,000 troops and extensive use of air power.

The timing appeared calculated to show NATO and the United States Moscow's military strength.

"In terms of actions, we've seen aggression and appeals to national sentiments that have historically been very dangerous in Europe and are rightly a cause of concerns," Obama told a news conference in Tallinn.

"No realistic political settlement can be achieved if effectively Russia says we are going to continue to send tanks and troops and arms and advisers under the guise of separatists, who are not home grown, and the only possible settlement is if Ukraine cedes its territory or its sovereignty."

Despite Russia's denials it has any military presence in Ukraine, Western governments say they have overwhelming evidence that it has sent in troops and tanks to rescue the separatists from defeat and enable them to turn the tide of the conflict.

Under NATO's treaty, an attack on any member state would be treated as an attack on all alliance members. The Baltic states including Estonia joined NATO and the European Union (EU) in 2004. Ukraine is not a member of either alliance.

German Chancellor Angela Merkel said in Berlin that NATO would guarantee the sovereignty of the Baltic States at the alliance's summit in Wales this week but would not change its treaties with Russia.

She said that all measures decided by NATO at the summit would comply with treaties between NATO and Russia, but NATO also had to improve its ability to react quickly in the region.

(Additional reporting by Gabriela Baczynska in Donetsk, Lidia Kelly, Jason Bush and Mark Trevelyan in Moscow, and Balazs Koranyi, David Mardiste and Steve Holland in Tallinn; writing by Timothy Heritage, editing by Elizabeth Piper and Giles Elgood)