Russia seized three Ukrainian ships after firing on them near the annexed Crimean peninsula yesterday.
The incident threatens a dangerous escalation in the crisis between the two countries and prompted Kiev to put its forces on full combat alert.
The standoff is the result of months of rising tensions over ships navigating the Azov Sea, a body of water north of the Black Sea shared by Ukraine and Russia.
Kiev accuses Moscow of trying to impose a de facto economic blockade on its ports in the Azov Sea to weaken it as part of a "hybrid war" against Ukraine.
It has called for further Western sanctions against Moscow.
The countries have been at loggerheads since Russia seized Crimea from Ukraine in 2014 and backed an insurgency in the eastern Donbass region that has killed more than 10,000 people despite a notional ceasefire.
What is the history of the dispute?
Squabbles over control of the Azov Sea and the Kerch Strait, which connects to the Black Sea to the south, are nothing new.
Tensions flared in 2003 during Vladimir Putin's first term as Russian president.
These were calmed with a 2003 bilateral treaty stipulating that both countries could use the Kerch Strait and Azov Sea freely for commercial shipping and must notify each other while sending military vessels.
What has happened this year?
Tensions have increased in the area this year.
Ukraine has accused Russia of persistently detaining ships sailing to and from its ports on the Azov Sea, especially Mariupol and Berdyansk, with a view to disrupting trade.
Russia in turn accuses Ukraine of harassing Russian ships, and says its own checks on Ukrainian vessels are lawful and necessary to ensure the security of the area.
Mariupol, which was briefly seized by pro-Russian separatists in 2014 before being recaptured by Ukrainian troops and volunteers, is a hub for exporting steel and grain and importing coal.
Ukraine says trade to the ports has been cut by 30% since Russia began hassling its ships.
Exports from Mariupol have fallen 6% and imports by nearly 9% this year, while exports from Berdyansk fell by 12.3%, data shows.
Ukraine was also incensed by Russia unveiling in May a $3.6bn bridge from its mainland across the Kerch Strait to Crimea.
The Strait links the Azov Sea to the Black Sea.
The bridge is too low for certain vessels to pass through, further hampering trade, Kiev says.
Ukraine says it has now deployed more air, land, sea and artillery forces to the area and plans to build a military base on the Azov Sea.
What happened on Sunday?
Russia seized three Ukrainian vessels after opening fire on them, wounding several sailors.
Russia's FSB security service said the ships - two small Ukrainian armoured artillery vessels and a tug boat - had illegally entered its territorial waters.
Russia accused the ships of manoeuvring dangerously and ignoring its instructions with the aim of stirring up tensions.
Ukraine said it had notified Russian authorities in advance of the three ships' movements - in line with the 2003 accord – and denied they had done anything wrong.
The Navy of Ukraine released footage, above, which it said came from a Russian ship and shows the incident.
Traffic through the Strait resumed today.
What happens now?
Ukraine has put its forces on full combat alert and President Petro Poroshenko has asked parliament to back his decision to impose martial law.
But any military response from Ukraine risks inviting a forceful reaction from Russia, whose Black Sea fleet is stationed in Crimea and outguns the Ukrainian navy.
At Kiev's urging, its Western allies could push for more sanctions on Russia, a prospect which pushed the rouble lower today.
The United Nations Security Council will discuss the crisis at the request of Russia and Ukraine.
NATO and the European Union urged restraint on all sides and urged Russia to restore full access to the Azov Sea for commercial vessels.
Russian politicians have accused Mr Poroshenko of deliberately instigating the standoff to boost his flagging popularity ahead of elections in March.
Some Ukrainian opposition politicians have speculated that he is using the introduction of martial law as an excuse to postpone the elections.