Russian tanks rolled across the border to back separatists in the breakaway South Ossetia region.
With many hundreds of people feared to have been killed and the South Ossetian capital, Tskhinvali, reported to have been severely damaged, Georgia said it was pulling 1,000 of its troops out of Iraq to redeploy them against Russia.
Georgia, a strong US ally, currently has 2,000 soldiers in Iraq, but half would now be withdrawn, a Georgian official, who described them as "some of our best soldiers", said.
The South Ossetian president, Eduard Kokoity, told Russian media that an estimated 1,400 people had died due to "Georgian aggression" against the region. The figure could not be verified.
The Russian incursion began after Georgia launched a major military offensive to retake control of South Ossetia, which has enjoyed de facto autonomy since the early 1990s but officially remains part of the country.
Only Russia has recognised its self-declared independence.
The Georgian president, Mikhail Saakashvili, said the two countries were already effectively at war.
"Russia is fighting a war with us in our own territory," he told CNN. "We are a freedom-loving nation that is right now under attack."
He called on the US to intervene, saying it was in Washington's interests to help his country.
Tskhinvali was reported to have suffered badly under heavy bombardment.
An official from the breakaway government said 1,000 people had been killed, although there was no independent verification of the figure.
"I saw bodies lying on the streets, around ruined buildings, in cars," one woman, Lyudmila Ostayeva, who fled with her family to a village near the Russian border, told the Associated Press.
"It's impossible to count them now. There is hardly a single building left undamaged."
In the heaviest fighting to afflict South Ossetia since the 1991-92 war in which it broke away from Georgia, a Russian army spokesman said tank and artillery units had "destroyed" Georgian positions around Tskhinvali.
A truce, agreed in 1992, is monitored by soldiers from Russia, Georgia and the neighbouring Russian region of North Ossetia, with which South Ossetia has close ties.
Earlier today, Saakashvili said 150 Russian tanks and armoured vehicles had entered the region and that his forces had shot down two Russian planes over Georgian territory.
At least 10 Russian peacekeepers were killed and 30 injured.
South Ossetia map
Russian forces moved towards Tskhinvali and bombed a military airbase outside the Georgian capital, Tbilisi, after the Russian president, Dmitry Medvedev, said it was his duty to punish those responsible for the deaths of his fellow nationals.
A majority of the roughly 70,000 people living in South Ossetia are ethnically distinct from Georgians, and many have Russian passports.
The US and EU urged an immediate end to hostilities.
"The European Union, in liaison with all the protagonists, is working towards a ceasefire so as to avoid an extension of the conflict," an EU statement said.
The US state department said Washington was sending an envoy to the region. "We support Georgia's territorial integrity and call for an immediate ceasefire," a spokesman added.
Russian forces moved across the border as Georgian troops held a three-hour ceasefire to allow civilians to be evacuated.
Before the Russian tanks rolled in, Medvedev told reporters: "Under the constitution and federal law ... I must protect the life and dignity of Russian citizens wherever they are."
Early today, Georgian troops exchanged fire with convoys carrying volunteer fighters over the border to support the separatists.
Georgia said Russian SU-24 jets had entered its airspace and bombed two locations, including Gori, the birthplace of the Soviet dictator Joseph Stalin, south of the Ossetian enclave. Russia denied this.
Vladimir Putin, the Russian prime minister and former president, said "aggressive" action by Georgia would incur a "response".
"The Georgian leadership has unleashed a dirty adventure," a ministerial statement said. "Blood spilled in South Ossetia will be blamed on these people and their associates."
Speaking through the Interfax news agency from China, where he is attending the Olympics, Putin blamed the Georgian leadership for its aggressive stance.
"Heavy weapons and artillery have been sent there, and tanks have been added," Putin said.
"Deaths and injuries have been reported, including among Russian peacekeepers. It's all very sad and alarming. And, of course, there will be a response."
The Kremlin decided to move into South Ossetia after Russia's security council met to discuss how to restore peace and defend civilians. Moscow has stressed it has a peacekeeping mandate and will act on it.
Saakashvili, who has ordered reservists into action, said "the greater part" of South Ossetia had been "liberated". Interfax said Georgian troops had entered Tskhinvali, but this was denied by Georgia.
The crisis in the Caucasus represents the first major test for Medvedev, but Putin's comments from China suggest he is calling the shots