Somalia's Islamist leader says 300 Ethiopian soldiers have crossed the troubled state's border - a claim denied by Ethiopian officials.
Islamic militants currently control the Somali capital
Sharif Sheikh Ahmed said Ethiopian soldiers had crossed in the south-west and entered the town of Dollow.
But an Ethiopian official suggested it was the Islamists who were planning an incursion into Ethiopia.
Many Somalis accuse Ethiopia of backing warlords ousted by the Islamist militia from Mogadishu.
Mr Ahmed, leader of the Union of Islamic Courts, accused Ethiopian troops of entering and leaving Somali border towns in recent days.
"They have deployed a lot of soldiers around the border towns, which is why we have been saying that Ethiopia is going to send in troops to Somalia," he said.
The Union of Islamic Courts gained control of Mogadishu just two weeks ago after months of fierce fighting.
Before that the Somali capital had been controlled by a group of secular warlords.
Dollow is on the road to Baidoa, seat of Somalia's weak transitional government.
"Ethiopia has not crossed the border," said Bereket Simon, an Ethiopian minister without portfolio and close ally of Prime Minster Meles Zenawi said.
"So far, the fundamentalists have occupied Baladwayne and are marching toward the Ethiopian border. Ethiopia hopes that they will not cross the border."
Reports say two of the Somali warlords defeated in the fighting in Mogadishu have fled the country.
Bashir Raghe and Muse Sudi Yalahow, both part of a coalition formed to fight the Islamist militia earlier in the year, are said to have left Mogadishu by boat.
Reports suggested that the two men had boarded a US vessel off the coast of Somalia.
"Bashir Raghe and Muse Sudi took a boat and they were picked up by the US," a senior aide to the Islamist leadership, Abdulrahman Ali Osman, told Reuters news agency.
"Everybody is running to their houses to take their guns. Bashir Raghe's house is being looted."
Setback for US
But a spokesman for the US Navy's Fifth Fleet, Jeff Breslau, said he had no information on the reports about the warlords.
The Union of Islamic Courts want to introduce Sharia law and end lawlessness on the streets.
Their victory in Mogadishu is seen as a major setback for US policy in the region.
The US has neither confirmed nor denied reports it backed the warlords but has said it will stop Somalia becoming a safe haven for terrorists.
Somalia has not had an effective national government for 15 years, during which time it has been fought over by a host of different armed factions.