An AFP correspondent at the scene said the swap began with the exchange of 30 captives from each side and would involve 222 separatist gunmen and 150 Ukranian troops by the time it is completed today evening.
The exchange, the largest by far in the eight-month separatist war was arranged on Wednesday with the help of Russian and European envoys attending tense talks in Minsk.
The negotiators are trying to iron out a broader deal that also involves a ceasefire and a troop and weapons withdrawal from the frontline that cuts across the mostly Russian-speaking industrial east of the former Soviet republic.
The same source said Ukraine would be willing to swap them for several dozen rebels still languishing in the country's jails.
Today's exchange was being conducted in a neutral town that rests about 50 kilometres (30 miles) north of the rebel-held eastern stronghold of Donetsk.
Commanders from both sides met on an empty road and read out names from prepared lists of prisoners to be exchanged in batches of 10 from each side.
The captives were all wearing civilian clothing and clutching small bags with their belongings as they stood about 100 metres (yards) apart along the side of the road and waited for their names to be called.
