Somalia's Transitional National Government (TNG) has put its forces on full alert.
It says it is acting in response to reports of a heavy military build up of Ethiopia troops, tanks and armoured personnel carriers along the border between the two countries.
Only last month, Ethiopian Prime Minister Meles Zenawi admitted to the BBC that he had occasionally sent troops into neighbouring Somalia to attack members of the militant Islamist group, al-Ittihad.
But Ethiopia's Minister of State for Foreign Affairs, Dr Tekede Alemu, told the BBC's Focus on Africa that the current allegations from Mogadishu were "completely false".
He denied that Ethiopia was massing troops on the border - and he also denied an earlier charge that some Ethiopian forces had already crossed into Somalia.
The Somali council of ministers has been holding an emergency meeting with parliament, to consider its response to what they say is the possibility of an Ethiopian attack.
It decided to recall its delegates from faltering peace talks taking place in Kenya for "consultations".
Meles Zenawi has admitted Ethiopian incursions in the past
The meeting, which was said to be heated, also expressed the fear that an attack on Somalia could come immediately after the United States attacked Iraq, at a time when the eyes of the international community were elsewhere.
Forces loyal to the TNG in the border regions of Hiran, Baklol and Gedo have now gone onto 100% alert.
The meeting also called on the international community to put pressure on Ethiopia to stop interfering in Somali internal affairs.
Ethiopia has accused the TNG of having links to Islamic fundamentalists and has backed armed Somali factions opposed to the TNG.
The TNG has little influence outside Mogadishu, but some factions spread across the country are loosely allied to it.