KYIV/LVIV, Ukraine, March 16 (Reuters) - New talk of compromise from both Moscow and Kyiv on a status for Ukraine outside of NATO lifted hope on Wednesday for a potential breakthrough after three weeks of war.
Ukraine's President Volodymyr Zelenskiy said negotiations were becoming "more realistic", while Russian Foreign Minister Sergei Lavrov said proposals now being discussed were "close to an agreement".
Russian President Vladimir Putin, who ordered his troops into Ukraine on Feb. 24, said Moscow was ready to discuss neutral status for its neighbour.
But Putin also said Russia would achieve its goals in Ukraine and would not submit to what he called a Western attempt to achieve global dominance and dismember Russia. The military operation was "going to plan," he said in a televised address.
On the ground, the 21st day of the conflict saw more bloodshed as Russian forces besieged and bombarded cities.
The United States said Russian forces had shot and killed 10 people waiting in line for bread in the city of Chernihiv. It did not cite evidence of the attack and Russia did not comment on the allegation, made in a U.S. Embassy statement.
The governor of Ukraine's Zaporizhzhia region said Russian forces had fired heavy artillery at a convoy of evacuees from the southern port city of Mariupol, wounding five people. Ukraine's military said children were among the casualties. Russia says it does not target civilians.
Three weeks into the conflict, Russian troops have been halted at the gates of Kyiv, having taken heavy losses and failing to seize any of Ukraine's biggest cities in a war Western officials say Moscow expected to win within days.
Talks were due on Wednesday by a video link for a third straight day.
"The meetings continue, and, I am informed, the positions during the negotiations already sound more realistic," Zelenskiy said in a video address overnight.
The Kremlin said the sides were discussing status for Ukraine similar to that of Austria or Sweden, both members of the European Union that are outside the NATO military alliance.
Ukraine's chief negotiator said Kyiv was still demanding a ceasefire and the withdrawal of Russian troops.
The signs of compromise sent relief through global financial markets.
In a speech to the U.S. Congress that drew a standing ovation, Zelenskiy appealed for tougher sanctions on Russia and more weapons to help his country fight "for the values of Europe and the world".
Speaking via a video link, he invoked the 1941 attack on Pearl Harbour and quoted Martin Luther King's "I have a dream" speech to call for a no-fly zone over Ukraine.
"In the darkest time for our country, for the whole of Europe, I call on you to do more," said Zelenskiy, who was unshaven and dressed in an army green T-shirt and showed video clips of dead and wounded children and buildings blasted by bombs.
The White House said later that U.S. President Joe Biden had not changed his opposition to imposing a no-fly zone over Ukraine, something military experts say would be the equivalent to the United States entering the war against Russia.
UKRAINE SHIFTS
In what was seen as a major shift, Zelenskiy had said on Tuesday Ukraine could accept international security guarantees that stopped short of its longstanding aim to join NATO.
Keeping Ukraine out of the Western military alliance was one of Russia's main demands before it unleashed what it calls a "special operation" to disarm and "denazify" its neighbour.
"Neutral status is now being seriously discussed along, of course, with security guarantees," Russia's Lavrov said. "There are absolutely specific formulations which in my view are close to agreement."
Vladimir Medinsky, Russia's chief negotiator, told state TV: "Ukraine is offering an Austrian or Swedish version of a neutral demilitarised state, but at the same time a state with its own army and navy."
Kremlin spokesman Dmitry Peskov said the idea "could really be seen as a compromise".
Austria and Sweden, the biggest of six EU members outside NATO, both have small militaries that cooperate with the alliance.
Ukraine's chief negotiator, Mykhailo Podolyak, said Kyiv was seeking direct talks between Zelenskiy and Putin. Moscow has said they could meet but only to finalise an agreement already hammered out.
"Our position at the negotiations is quite specific - legally verified security guarantees; ceasefire; withdrawal of Russian troops. This is possible only with a direct dialogue between the heads of Ukraine and the Russian Federation," Podolyak said.
While Russia has long objected to Ukraine's NATO ambitions, Kyiv and its allies have said Moscow's true aim was to overthrow Ukraine's pro-Western, elected leaders, which was thwarted by Ukraine's stiff battlefield resistance.
THREE MILLION REFUGEES
Europe's biggest invasion since World War Two has ravaged Ukrainian cities and sent more than 3 million refugees fleeing to neighbouring countries.
The streets of the capital Kyiv were largely empty after authorities imposed a 35-hour curfew. Several buildings in a residential area were badly damaged after what appeared to be a Russian missile was shot down in the early hours, residents and emergency workers said.
Still, Ukrainian forces have withstood an assault by a much larger army. Zelenskiy said Ukrainian troops had killed a fourth Russian major general in the latest fighting. Reuters was not able to verify this.
Ukraine said about 20,000 people had escaped the besieged port of Mariupol in cars, but hundreds of thousands remain trapped under bombardment without heat, power or water.
Deputy Prime Minister Iryna Vereshchuk said 400 staff and patients were being held hostage at a hospital Russian forces had captured in Mariupol on Tuesday.
Russia was due to pay $117 million in interest on dollar-denominated sovereign bonds, but may pay in roubles instead, amounting to its first default on foreign debt since the Bolshevik revolution. Moscow said it had the money, and Washington would be to blame if it cannot pay.
In his most explicit acknowledgment of the pain inflicted by Western sanctions, Putin said inflation and unemployment would rise, and structural changes to the economy would be needed.
