MOSCOW/DONETSK, Ukraine (Reuters) - Ukrainian forces launched a "large-scale operation" to retake the eastern town of Slaviansk, pro-Russian separatists holding the town said on Friday, as security deteriorated in a crisis that has provoked the biggest confrontation between Russia and the West since the Cold War.

A Reuters photographer said he saw a military helicopter open fire on the outskirts of the town and a reporter heard gunfire. Separatists said they were under attack and that at least one helicopter had been shot down.

Vyacheslav Ponomaryov, the self-declared mayor or the town, was quoted by Russia's Interfax news agency as saying two helicopters had been shot down and one pilot had been detained. Another had been killed.

Armed groups seeking union with Russia have seized a number of government buildings in towns in eastern Ukraine. The action in Slaviansk, if confirmed, would mark the first significant military response by Kiev.

In Kiev, an aide to Ukrainian Interior Minister Arsen Avakov said he could not comment. "Until it's over, no one will say anything," the aide said.

The apparent assault to retake Slaviansk came only hours after Russia staged a huge May Day parade on Moscow's Red Square on Thursday - its first since the Soviet era - with workers holding banners proclaiming support for President Vladimir Putin after the seizure of territory from neighboring Ukraine. On Wednesday, Ukraine's leaders - who came to power in February when the previous Moscow-backed president was toppled after months of protests - conceded they were "helpless" to counter the fall of government buildings and police stations in the Donbass coal and steel belt. Donbass is the source of around a third of Ukraine's industrial output.

Separatists had also stormed the prosecutor's office in the city of Donetsk, throwing rocks, firecrackers and teargas at riot police defending officials they accused of working for the Western-backed government in Kiev.

Rebels in the city, capital of a province of about 4 million people, have declared a "People's Republic of Donetsk" and called a referendum on secession for May 11, undercutting a planned presidential election in Ukraine two weeks later.

Having seized buildings in the capital of the easternmost province, Luhansk, on Tuesday, gunmen took control at dawn on Wednesday in the nearby towns of Horlivka and Alchevsk.

The International Monetary Fund warned that if Ukraine lost territory in the east it would have to redesign a $17 billion bailout of the country, probably requiring additional financing.

DIPLOMAT EXPELLED

Citing the situation in the east, acting Ukrainian President Oleksander Turchinov has signed a decree reinstating compulsory military service for men aged between 18 and 25.

The Kiev government, along with its Western allies, accuses Moscow of orchestrating the uprising. The United States and European Union have imposed sanctions in response to Russia's annexation of Crimea and involvement in eastern Ukraine.

Russia denies having any part in the rebellion, but has warned it reserves the right to intervene to protect ethnic Russians and has massed tens of thousands of troops on its western frontier with Ukraine.

Putin has described the break-up of the Soviet Union as a tragedy and overturned years of post-Cold War diplomacy in March by declaring Moscow's right to intervene in former Soviet republics to protect Russian speakers.

The U.S. and EU sanctions, while not hitting Russian industry directly, have hurt the economy by scaring investors into pulling out capital. The IMF cut its outlook for Russian economic growth this year to just 0.2 percent on Wednesday and said Russia was already "experiencing recession".

U.S. aluminum producer Alcoa said its Chief Executive Klaus Kleinfeld had canceled plans to attend Putin's St. Petersburg International Economic Forum later this month.

Kiev ordered the expulsion of Russia's military attache on Thursday, saying it had caught him "red-handed" receiving classified information from a colonel in Ukraine's armed forces on the country's cooperation with NATO.

A spokeswoman for Ukraine's security service, the SBU, said the attache had been handed over to the Russian embassy and ordered to leave, although she was not sure if he had left yet.

NATO said on Thursday it was looking at ways to bring former Soviet state Georgia, which Russia invaded in 2008, "even closer" to the military alliance. Russian forces defend two breakaway Georgian regions, comprising a fifth of its territory.

Moscow strongly opposes Georgia joining NATO. Last week, France and Germany assured Georgia that a deal bringing it closer to the EU would be sealed soon.

Romania, a formerly part of the Soviet bloc but now a NATO member, called on Thursday for the United States and the Western alliance to boost their military presence there.

Moscow mayor Sergei Sobyanin told Rossiya 24 TV that more than 100,000 people had marched through Red Square on Thursday, saying there was a "patriotic uplift" in Russia. Russian television also showed footage of a May Day parade in Crimea's capital, Simferopol.

The intervention in Ukraine has been enormously popular in Russia. One opinion poll on Wednesday showed 82 percent support for Putin, his highest rating since 2010.

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