Ukraine's interior ministry said 42 people had died in the fire Friday, with local media reporting that pro-Russian militants were believed to have been in the burning building at the time.
Most of those who were killed died from smoke inhalation, while others perished trying to escape by jumping out of windows.
Russia said it was "outraged" as the scenic port city became a new front in an escalating months-long crisis that has sparked fears of a Russian invasion.
The foreign ministry in Moscow called on Ukraine and its "Western backers to end the anarchy and take responsibility before the Ukrainian people," blaming Kiev's "criminal irresponsibility" for the sinister turn of events.
It capped a day of violent clashes between pro-Russian and pro-Ukrainian militants, with reports of renewed fighting in Slavyansk leading to the deaths of two more Ukrainian soldiers, meaning at least nine people had been killed in violence in the flashpoint eastern town throughout the day.
Already the most serious rupture in West-Moscow relations since the Cold War, the diplomatic war of words intensified as the United States threatened to hit Russia with new sanctions within three weeks over what Washington called its continued "destabilisation" of Ukraine.
President Barack Obama threatened to expand punitive sanctions to broad sections of the Russian economy if Moscow continued to foment chaos in the former Soviet republic ahead of planned May 25 presidential elections.
"If in fact we see the disruptions and the destabilisation continuing so severely that it impedes elections on May 25, we will not have a choice but to move forward with additional... severe sanctions," Obama said at a joint news conference with German Chancellor Angela Merkel.
"If Russia continues on its current course, we have a range of tools at our disposal, including sanctions that would target certain sectors of the Russian economy."
Previously, the administration had said such measures would only come into force if Russia sent its estimated 40,000 troops over the border.
The unrest in Ukraine started with peaceful demonstrations in Kiev in November against then president Viktor Yanukovych but has rapidly degenerated into a full-blown global crisis.
After a deadly crackdown on protesters, Yanukovych was forced out and replaced with the Western-backed administration.
That sparked fury in Moscow, which responded with a blitz annexation of Crimea.
- 'Full-scale attack' -
In a sign of worsening relations, US Secretary of State John Kerry announced he was postponing a phone call with Russian Foreign Minister Sergei Lavrov.
And while Obama was speaking at the White House, an emergency meeting of the UN Security Council took place at Russia's request to complain about the Ukrainian army's assault on Slavyansk -- an attempt by Kiev's interim rulers to grab back the initiative from pro-Moscow rebels.
The Kremlin -- which has denied links to rebels who have taken over buildings in dozens of towns and cities in Ukraine's east -- said the raid was "leading Ukraine towards catastrophe" and pronounced dead a peace deal struck in Geneva last month.
Russian Prime Minister Dmitry Medvedev urged Kiev to "stop killing their citizens," branding the Slavyansk raid "a sign of criminal helplessness."
Ukraine's interim president Oleksandr Turchynov said "many rebels" had been killed in the military's pre-dawn raid and confirmed the loss of two servicemen after insurgents shot down two helicopter gunships.
Rebels later said three of their number and two citizens were killed in a "full-scale attack" that seemed to dash hopes of a quick release of seven European monitors being held in the town.
Rebels parked two previously captured armoured vehicles in front of the town hall where they are holding the seven OSCE observers they seized on April 25.
Before the blaze, three people were killed in Odessa, where pro-Russian militants clashed with 1,500 people holding a rally for Ukrainian unity.
- 'A real battle' -
Ukraine Interior Minister Arsen Avakov said rebels used shoulder-launched missiles to down the helicopters.
"It's a real battle we are waging against professional mercenaries," he wrote on his Facebook page.
"Our demands for the terrorists are simple: release their hostages, lay down their arms, leave administrative buildings and restore the normal functioning of the urban infrastructure."
The self-proclaimed pro-Russian mayor of the town, Vyacheslav Ponomaryov, urged "women, children and pensioners to stay in their homes" and "all armed men to help" combat the assault.
"We will defend the town and we will win," the mayor, dressed in camouflage uniform and wearing a bulletproof vest and helmet, said in a video posted on a local website.
There was further fighting in Slavyansk, with two more Ukranian soldiers killed in what the Ukrainian defence ministry termed "intense combat."
Russian news agencies quoted President Vladimir Putin's spokesman as saying the offensive on Slavyansk was "essentially finishing off the last hope for the feasibility of the Geneva accord."
And Russia's envoy to the OSCE, Andrei Kelin, said Moscow had urged the pan-European body to "take steps to stop this reprisal raid," according to the ITAR-TASS news agency.
In Warsaw, Russian Energy Minister Alexander Novak told reporters that state-run gas firm Gazprom could restrict supplies to Ukraine -- and by extension several European countries -- if Kiev did not pre-pay its bill for June by the end of this month.
Kiev is expected to use part of a $17 billion loan from the International Monetary Fund to settle the bill.