Ukrainian forces reached the eastern bastion of Lyman on Saturday after claiming to have encircled thousands of Russian troops in a battlefield rebuttal to the Kremlin a day after it proclaimed a swathe of its territory part of Russia.

The capture of Lyman would be a major setback for Moscow after President Vladimir Putin proclaimed the annexation of the Donetsk region, along with three other regions, at a ceremony on Friday that was condemned by Kyiv and the West as a farce.

Two grinning Ukrainian soldiers taped the yellow-and-blue national flag on to the "Lyman" welcome sign at the town's entrance in Donetsk region's north, a video posted by the president's chief of staff showed.

"October 1. We're unfurling our state flag and establishing it on our land. Lyman will be Ukraine," one of the soldiers said, standing on the bonnet of a military vehicle.

Russia had 5,000 to 5,500 troops at Lyman but the number of encircled troops could be lower because of casualties, a spokesperson for Ukraine's eastern forces said.

"The Russian grouping in the area of Lyman is surrounded," the spokesperson, Serhii Cherevatyi, said on television.

The Russian Defence Ministry did not immediately respond to a request for comment.

Russia's last operational update was on Friday evening. On Saturday, the ministry's Telegram channel published a series of congratulatory messages, including one from Putin, to mark an army holiday, Ground Forces Day.

Russian military bloggers said the loss of the town would be a serious blow for Moscow, but one said that some Russian forces had been able to withdraw and that Lyman was not fully surrounded.

Neither side's battlefield assertions could be independently verified.

Russia has used Lyman as a logistics and transport hub for its operations in the north of the Donetsk region. Its fall would be Ukraine's biggest battlefield gain since a lightning counteroffensive in the northeastern Kharkiv region last month. (Reuters)