By Pavel Polityuk and Alexei Kalmykov

KIEV (Reuters) – Ukrainian authorities on Wednesday halted all cargo traffic with rebel-held territory in the east of the country, formalizing an existing rail blockade by Ukrainian activists that has fueled the worst political crisis in nearly a year.

In a standoff that is hurting the economies of both sides, separatists have seized control of some Ukrainian businesses in their territory after having their coal and steel shipments halted in the rail blockade.

Tensions have escalated in recent days, leading to clashes between law enforcement agencies and the activists, who have been joined by some members of parliament.

The blockade posed a dilemma for President Petro Poroshenko: breaking it up by force could provoke a major domestic backlash, but allowing it to proceed unilaterally risked undermining the state’s authority.

Poroshenko’s Security and Defense Council introduced the state-led cargo ban to counter what he described as the political and social threat posed by the unofficial blockade.

The decision “is dictated by the necessity to prevent the destabilizing of the situation in the country, which is being undermined by political operators,” he told the council.

“Our wish is to prevent social strife,” he said.

The suspension will remain until rebels hand back control of a number of Ukraine-registered businesses and comply with a 2015 peace agreement, according to the Security Council.

The asset seizures have mostly affected businesses in the financial and industrial group owned by Ukraine’s richest man, Rinat Akhmetov.

On Wednesday, Akhmetov’s DTEK Energy said its main mining assets in rebel-held territory, already idling because of the blockade, had been taken under separatist control. On the international debt market, its 2024 dollar bond fell 1.6 cents to a two-week low on the news.

The crisis has put pressure on Prime Minister Volodymyr Groysman’s government just as it is about to lose its year-long immunity from facing any vote of no confidence. It was appointed last April by a fragile coalition that includes Poroshenko’s party, after the previous government fell.

Rebel leader Alexander Zakharchenko said Ukraine’s decision had nothing to do with the separatists, saying it was instead “evidence of an internal power struggle in Kiev.”

The suspension will further squeeze the Ukrainian economy, already facing potential rolling blackouts and monthly economic losses of up to 4 billion hryvnias ($150 million) from the existing blockade, according to the government.

The central bank says expected economic growth could nearly halve this year to 1.5 percent if rail traffic does not resume.

Poroshenko expects the government on Thursday to come up with fresh forecasts for the impact of the broader ban on the economy, energy security and currency stability.

The trade squeeze has highlighted the complicated economic relationship between the two sides and represents a new phase in a stand-off that has killed more than 10,000 people.

Germany, which has taken a leading role in trying to end the conflict, said it was seriously concerned about “increasing partitionist tendencies” in eastern Ukraine.

Foreign Ministry spokesman Martin Schaefer told a government news conference: “The danger of a military escalation is far from over.”

He said Berlin was urging Ukraine and Russia to live up to agreements made as part of the 2015 Minsk peace process, citing troubling actions by both sides, including the rebel asset seizures and the government’s decision to cut off trade.

(Additional reporting by Andrea Shalal in Berlin; Writing by Alessandra Prentice; Editing by Matthias Williams and Mark Trevelyan)