YEREVAN, Armenia (AP) — Fighting raged Monday around Nagorno-Karabakh, with Azerbaijan saying it lost three of its troops in the separatist region while inflicting heavy casualties on Armenian forces and the Armenian president warning that the hostilities could slide into a full-scale war.

The Azerbaijani Defense Ministry said Armenian forces continued shelling Azerbaijani military positions and front-line villages despite a cease-fire that Azerbaijan unilaterally declared Sunday.

The ministry said that up to 170 Armenian troops have been "neutralized" and 12 Armenian armored vehicles have been destroyed Monday. Armenian Defense Ministry spokesman Artsrun Ovannisian dismissed the claim as a product of the Azerbaijani military's "wild imagination."

The outbreak of hostilities that erupted Saturday is the worst since a war that ended in 1994, leaving Nagorno-Karabakh under the control of local ethnic Armenian forces and the Armenian military. Armenian forces also occupy several areas outside Karabakh proper.

International efforts to settle the conflict, fueled by long-simmering tensions between Christian Armenians and mostly Muslim Azeris, have brought no results.

The Karabakh military said Monday 20 of its servicemen have been killed since Saturday, another 72 have been wounded and seven of its tanks have been destroyed.

Azerbaijan said earlier that 12 of its soldiers were killed Saturday when the fighting flared up.

The warring parties have put enemy losses in the hundreds, claims which couldn't be independently verified and were promptly denied by the opposing side.

Ovannisian, the Armenian Defense Ministry spokesman, said Monday that Karabakh militia advanced overnight, "liberating new positions." He also claimed that Armenian artillery hit Azerbaijani units as they were moving to the front line.

Self-proclaimed officials in Karabakh said fighting intensified in the morning in the southeast and northeast with the Azerbaijani troops using Grad multiple rocket launchers.

Azerbaijan's Foreign Ministry blamed Armenian forces for shelling residential areas despite a unilateral cease-fire announced by Baku, warning that "Armenia will bear the blame for possible counterattacks and retaliatory measures by Azerbaijan's armed forces."

Azerbaijan's defense minister warned that his forces will open up an artillery barrage on Stepanakert, the main city in Karabakh, if the Armenian forces don't stop shelling populated areas.

Armenian President Serzh Sargsyan warned Monday that his country could formalize its ties with Karabakh by officially recognizing its independence if the fighting escalates.

He warned that the escalation of hostilities could lead to a "large-scale war." ''It will affect security and stability not only in South Caucasus, but Europe as well," Sargsyan said.

In Moscow, Russian President Vladimir Putin's spokesman, Dmitry Peskov, said the Kremlin was "seriously worried" about the continuing fighting in the region and added that Russia will continue its efforts to ensure a cease-fire.

Armenia is a member of Moscow-dominated economic and security alliances, including several ex-Soviet nations, and it also hosts a Russian military base.

At the same time, Russia has sought to maintain friendly ties with energy-rich Azerbaijan, which serves as a key conduit for Caspian oil and gas resources flowing to the West. Despite its close ties with Armenia, Russia also has sold weapons to Azerbaijan.

Sargsyan said that among the weapons used by Azerbaijan in the latest fighting was the TOS-1 heavy flamethrower system. Azerbaijan obtained the powerful weapon that fires thermobaric rockets from Russia in a deal that angered many in Armenia.

Aida Sultanova in Baku, Azerbaijan, and Vladimir Isachenkov in Moscow, contributed to this report.