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A government statement said that Ethiopian troops had overrun 100km of heavily-fortified Eritrean trenches, dealing a "monumental and humiliating defeat" to the Eritrean army.

But Eritrean authorities rejected the suggestion of a wholesale defeat, describing Ethiopia's victory statement as "boasting and lies".

Eritrea denies defeat

Eritrean radio said on Sunday its forces had foiled an Ethiopian offensive on the Mereb-Setit front between the two countries.

Richard Lee: Diplomatic sources say both sides suffered heavy casualties

The Eritrean broadcast said: "The expansionist weyane [Ethiopian] group continued with its offensives on the Mereb-Setit front today and was foiled like the past offensives with severe losses."

The authorities in Asmara have conceded that Ethiopian troops have penetrated beyond Badme, but deny that they have suffered a total defeat.

Thousands of people have been displaced by fighting

They say that their army has merely withdrawn to new defensive positions.

Despite Ethiopia's claim to victory, there were reports of fresh outbreaks of fighting on Sunday.

Eritrean presidential chief of staff Yemane Gebremeskel said Ethiopian forces had launched a new attack against the Eritrean army along the western Badme front at around 1100 local time (0800 GMT).

Fighting broke out on Tuesday as Ethiopian troops tried to recapture territory occupied by Eritrea.

Heavy losses

The Ethiopian Government said its forces had, in the space of four days, managed to destroy the enemy troops, "sending them into total disarray".

"Enemy army personnel left over have fled, scattering and leaving behind their military armaments," it said in the statement.

Ethiopia said that tens of thousands of Eritrean troops were killed, wounded or captured in the last few days of fierce fighting.

These figures are rejected by the Eritreans who argue that the Ethiopians have incurred the heaviest casualties. These claims and counter-claims cannot be independently verified.

But diplomats confirm that both sides have suffered extremely heavy losses.

Peace plan

News of Ethiopia's victory declaration came hours after the United Nations announced that Eritrean President Issaias Afeworki had accepted an Organisation of African Unity (OAU) peace plan which implies Eritrean withdrawal from the contested western Badme zone.

Eritrea's acceptance of the peace plan - effectively a reversal of its earlier position - came after Ethiopian troops breached its lines at Badme and captured up to 10km of territory that Eritrea had claimed for itself.

The war between the two neighbours began in May last year, with the initial battles lasting for about five weeks. The latest fighting resumed on 6 February, ending an eight-month stalemate.