The team was being held in the eastern city of Slovyansk, said Stella Khorosheva, a spokeswoman for the town's self-proclaimed separatist mayor. She said the group possessed "suspicious materials," but said they were unharmed and would be released after further investigation.
The OSCE wrote on Twitter that they had lost communication with the German-led team, but that all members of the OSCE monitoring team were safe.
Germany's Defense Ministry said it had lost contact with the team, which it said was made up of 13 people - five Ukrainians, three German soldiers, a German translator and one soldier each from the Czech Republic, Poland, Sweden and Denmark.
Contact broke off around lunchtime and, as of Friday evening, "we are still not in contact," a German Defense Ministry spokesman said on condition of anonymity in line with department rules. However, he said the ministry couldn't confirm reports from Ukraine that they were being held by separatists.
But Czech military spokesman Jana Ruzickova said the team was detained.
German Defense Minister Ursula von der Leyen was quoted on ARD television's website as saying, "At the moment, we cannot rule out that the international OSCE military observers are being held in Ukraine."
"We have not had contact since midday ... they are in Ukraine on a neutral, international mission to give the international community an objective picture of the situation," said von der Leyen, who added that Germany is using all diplomatic channels to restore contact.
Pro-Russian insurgents have seized police stations and government buildings in at least 10 cities and towns in eastern Ukraine in April. Militia groups have kidnapped several journalists over the past week in the increasingly unstable region.
AP correspondents Peter Leonard in Donetsk, Geir Moulson in Berlin, and Karel Janicek in Prague, contributed to this report.