The sources said there were reports that tanks had been deployed by both sides but this could not immediately be confirmed.
One military source said heavy fighting broke out at around 4 a.m. (0100 gm) near the town of Krasny Liman, which has been under government control since early this month, and that separatists in the area appeared to have tried to break through a cordon of government troops.
"There's a major battle going on which exceeds in terms of force and scale anything there has been up to now," the military source said.
Dmytro Tymchuk, a military analyst who has good sources in the military, said separately that fighting had begun when separatists refused a call for them to lay down their arms in line with a peace plan outlined by President Petro Poroshenko.
Up to 4,000 separatist fighters could be involved and armoured vehicles, possibly tanks, were being used by each side, the military source said.
"The anti-terrorist operation is continuing. There is a battle going on," government forces spokesman Vladyslav Seleznyov said.
Asked about the report that 4,000 separatists could be involved, Seleznyov replied: "Then, there'll be 4,000 coffins".