Russian tanks have entered the capital of Georgia's breakaway region of South Ossetia, says Georgian President Mikhail Saakashvili.
Georgia has been fighting separatists with ties to Russia in order to regain control of the province, which has had de facto independence since the 1990s.
Georgia is reported to have said any involvement of Russian forces in the conflict will result in a state of war.
Russia's president promised to defend Russian citizens in South Ossetia.
Moscow's defence ministry said more than 10 of its peacekeeping troops in South Ossetia had been killed and 30 wounded in the Georgian offensive. At least 15 civilians are also reported dead.
Nato, the US and the EU have all called for an immediate end to hostilities.
Georgia's president said 150 Russian tanks and other vehicles had entered South Ossetia.
He told CNN: "Russia is fighting a war with us in our own territory."
Mr Saakashvili, who has called on reservists to sign up for duty, said: "This is a clear intrusion on another country's territory.
"We have Russian tanks on our territory, jets on our territory in broad daylight," Reuters new agency quoted him as saying."
He also said Georgian forces had shot down two Russian jets on Georgian territory, although Russia denied any of its fighters had entered its neighbour's airspace.
Moscow's defence ministry said reinforcements for Russian peacekeepers had been sent to South Ossetia "to help end bloodshed".
Following reports of Russian deaths, President Dmitry Medvedev said: "I must protect the life and dignity of Russian citizens wherever they are," Interfax news agency reported.
"We will not allow their deaths to go unpunished. Those responsible will receive a deserved punishment."
More wars and rumours of war.