As he spoke heavy fighting was still reported in a disputed border area known as the Yerga Triangle.

Thousands of civilians are said to be fleeing the area.

Mr Zenawi said that while he accepted the plan, he had ordered Ethiopian defence forces to take all necessary measures to safeguard the country's territorial integrity.

The plan calls for the withdrawal of Eritrean forces from the area, an observer force, the return of a civilian administration and an investigation into the conflict.

There has been no immediate Eritrean reaction.

Heavy fighting

The two sides have battled with heavy artillery, mortars and small arms.

A BBC correspondent in the Eritrean capital, Asmara, says the Alitena region, where the battle is taking place, is an area of dramatic barren mountains, and the two sides are facing each other across a broad valley.

The Eritreans say the Ethiopians have now been forced back to what the Eritreans say is the international border.

Mutual accusations

Ethiopia and Eritrea have each accused the other of launching the latest offensive.

Eritrean radio quotes statement: "This attack will plunge the dispute into a new and dangerous phase" (in Tigrigna)

The Eritrean Foreign Ministry described the clash as a dangerous escalation of a border dispute between the two countries, which until recently enjoyed friendly relations.

It said this was the fourth attack by Ethiopia in less than two weeks.

Ethiopia's Foreign Ministry, in turn, accused Eritrea of starting the battle.

Ethiopian radio quotes foreign ministry statement (in Amharic)

"Prior to this morning's foiled attack on Aiga and Alitena ... the Ethiopian government refrained from engaging in any action which could potentially exacerbate the situation," said a statement broadcast by state radio on Wednesday.

Former friends

The Ethiopian Prime Minister Meles Zenawi and Eritrean President Isayas Afewerki were formerly allies as rebel leaders who succeeded in ousting Ethiopian military leader Mengistu Haile Mariam in 1991.

Eritrea won independence from Ethiopia after a referendum in 1993, and the two countries maintained close political and economic ties.

These started to show signs of strain late last year when they disagreed over Eritrea's decision to adopt its own currency.

The two countries began massing troops and armoured vehicles along the joint border after each accused the other of territorial incusions in early May.