KIEV, Nov. 5 – Ukraine said on Wednesday it would halt payment of state funds in areas controlled by pro-Moscow rebels, as both sides hardened positions in what is rapidly becoming a long-term stalemate that the West believes is Russia's aim.

A day after the rebels held inauguration ceremonies for their leaders, the separatists and the central government each accused each other of violating a September peace deal and signaled they would withdraw support for some of its terms, Reuters reported.

The past four days have seen the rebels stage elections for leadership which the government called illegal, and the government respond by saying it would revoke a law that would have granted eastern regions autonomy and sent them cash.

Despite a ceasefire declared two months ago, two teenagers were killed by shelling in Donetsk, one of the two separatist strongholds, on Wednesday as they played football on a school sports field, the city's administration said.

The rebels say their newly elected leaders must be allowed to negotiate with Kiev directly; Kiev says this is impossible. Both sides' positions reverse parts of the 12-point peace plan, the Minsk protocol, agreed in Belarus in September.

With Kiev lacking the military might to break the rebels by force, Western allies now fear that a large chunk of Ukrainian territory will become a Russian protectorate with a parlous economic future, beyond the writ of the central government.

"We have now realistically entered the phase of a 'frozen conflict'," said Yuriy Yakimenko, a political analyst at Ukraine's Razumkov political research center, using a term often applied to other ex-Soviet republics where separatist enclaves have been protected by Russian troops since the early 1990s.

Kiev and the West fear Russian President Vladimir Putin's grand design, following the annexation of Crimea in March, is to render Ukraine ineligible to become part of mainstream Europe, with a conflict left unresolved within its borders.

"Russia will direct its efforts at supporting instability, at hindering the creation of Ukrainian law-based institutions and at increasing permanent instability," Yakimenko said.

Moscow denies sending in troops and weapons to support the rebels, although many of its soldiers died there, especially in August when Western governments say Russia dispatched armored columns to protect the rebels from the defeat.

Prime Minister Arseniy Yatseniuk told a government meeting that Kiev would continue to supply gas and electricity to the separatist regions but "so long as the territories of Donetsk and Luhansk regions are controlled by imposters, the central budget will not send funding there."

The cut-off of funding would deprive the war-shattered rebel-held regions of money for schools, hospitals and infrastructure. Pensions are still being paid into accounts of retired workers in rebel held areas, but banks there have been cut off so recipients must move to other parts of Ukraine to collect.

Kiev appears to be aiming now to isolate the separatist leadership rather than break it. The message on Wednesday was that the rebel leaders may have to turn to Moscow now for cash handouts and subsidies to finance their breakaway aspirations.

This is a risky strategy as it could be seen as Kiev abandoning Ukrainians living in rebel-held areas. But Poroshenko is not expected to order a new military offensive, despite issuing a decree on Wednesday that would raise defense spending to 3 percent of gross domestic product from 1 percent.

Ukrainian troops suffered big losses in August when they were cut off by separatists Kiev said were backed by Russian troops. Despite the ceasefire, more than 100 Ukrainian soldiers have been killed since the truce came into force.

"A 'hot phase' is still going on. There is no 'frozen conflict' here," said Taras Berezovets of the Berta political research center.

Kiev's military effort now puts less emphasis on taking back the Donetsk and Luhansk rebel strongholds than on protecting other cities from any further Russian-backed assault.

Poroshenko said on Tuesday he was sending newly formed units to cities including Mariupol on the Sea of Azov, a possible strategic target since it lies on a coastal route from the Russian border to Crimea.

In a decree made public on Wednesday aimed at strengthening the state's defenses, Poroshenko also ordered the government to work on a new model for guaranteeing national security, and re-introduced an old Soviet-era practice of providing basic military training in schools. (rt/ez)