Turkey ignored new sanctions from the United States to press on with its assault on northern Syria on Tuesday, while the Syrian army entered one of the most hotly contested cities, filling a void created by Donald Trump's abrupt retreat.
A week after reversing U.S. policy and moving troops out of the way to allow Turkey to attack Washington's allies in northern Syria, Trump announced a package of sanctions to punish Turkey.
But financial markets shrugged off the announcement, and Trump's critics said the moves were too feeble to have an impact. The Turkish lira actually went up, with traders noting Trump had spared Turkish banks from punishment.
Trump's unexpected decision to withhold protection from Syria's Kurds after a phone call with Turkish President Tayyip Erdogan a week ago swiftly upended five years of U.S. policy in the Middle East, giving a free hand to Washington's adversaries in the world's deadliest ongoing war.
The United States announced on Sunday it was withdrawing its entire force of 1,000 troops. Its former Kurdish allies immediately forged a new alliance with the Syrian government of President Bashar al-Assad, inviting the army into towns across the breadth of Kurdish-held territory.
TROOPS ENTER MANBIJ
One of the most important flashpoints is the city of Manbij, west of the Euphrates river, which Turkey has vowed to capture. The area had been patrolled jointly by U.S. and Turkish forces under a deal aiming to persuade Turkey not to invade.
The Syrian forces appear to have moved swiftly to fill the void left by departing Americans. State television broadcast footage of what it said was government troops entering the city on Tuesday. A resident inside the city told Reuters the Syrian troops were on its outskirts.
Turkey-backed Syrian fighters said they would continue their advance towards Manbij, and said the troops that had entered were mostly Kurdish fighters now allied to the government.
A Reuters cameraman on the Turkish frontier reported heavy bombardment on Tuesday morning of the Syrian border town of Ras al Ain, where a spokesman for the Kurdish-led Syrian Democratic Forces reported a fierce battle was taking place.
SANCTIONS ANNOUNCEMENT "FALLS VERY SHORT"
Trump has defended his reversal of U.S. policy as part of a plan to withdraw the United States from "endless" wars in the Middle East. But his critics, including senior figures in his own Republican Party, cast it as a betrayal of the Kurds, loyal allies who lost thousands of fighters in battle against Islamic State with Washington's support.
The Democratic speaker of the House of Representatives, Nancy Pelosi, said Trump's sanctions were too little, too late.
"His announcement of a package of sanctions against Turkey falls very short of reversing that humanitarian disaster."
Turkey says it aims to defeat the Kurdish YPG militia, which it sees as terrorists for its links to separatists in Turkey, and to create a "safe zone" where millions of Syrian refugees can be resettled.
The United Nations says 160,000 people have fled their homes as Turkish forces advance. The Kurdish administration puts the number of displaced at 270,000.
Erdogan, who has pledged to continue military operations come what may, said Turkey was giving the world a "second chance" to bring peace to the region.
"The international community missed its opportunity to prevent the Syrian crisis from pulling an entire region into a maelstrom of instability," he wrote in the Wall Street Journal. "The European Union - and the world - should support what Turkey is trying to do."
The Syrian army deployments into Kurdish-held territory are a victory for President Bashar al-Assad and his most powerful ally, Russia, giving them a foothold in the biggest remaining swath of the country that had been beyond their grasp.
Trump allies insisted Washington had not given its blessing to the Turkish offensive and demanded a ceasefire.
"The United States of America simply is not going to tolerate Turkey's invasion in Syria any further," Vice President Mike Pence said. "We are calling on Turkey to stand down, end the violence and come to the negotiating table."
Trump's sanctions include reimposing steel tariffs and halting talks on a $100 billion trade deal.
But the decision not to hit Turkish banks led to a rally in Turkish financial stocks: "The sanctions are not related to banking, so the markets will have a positive perception," said Cem Tozge, asset management director at Ata Invest.
In a potentially more damaging blow, German carmaker Volkswagen said it was postponing a final decision on whether to build a 1 billion euro ($1.1 billion) plant in Turkey, citing concern over "current developments" after international condemnation of the incursion.
Trump said U.S. troops would remain at a small garrison at Tanf in southern Syria "to continue to disrupt remnants" of Islamic State. But the base would do little to support operations elsewhere in the country.