Heavy fighting has broken out in the Somali capital, Mogadishu, with Islamic militia using rockets and artillery.
The Islamists control much of southern Somalia
The Islamists, who control most of the south of the country, are trying to take an area in the city's south that is controlled by warlord Abdi Qeybdid.
Eyewitnesses spoke of heavy casualties with up to 60 people reported killed and 100 injured in two days of clashes.
Meanwhile, hundreds of Ethiopian troops and 70 trucks are reported to have crossed into Somalia.
Details of the incident are still sketchy, but eyewitnesses say the troops crossed the frontier in the Gedo region of southern Somalia.
The weak transitional government, based in the town of Baidoa, has had close links with Ethiopia since it was formed in Kenya, two years ago.
Abdi Qeybdid is the last of the warlords defeated by the Islamists still in Mogadishu.
There are reports of civilians being caught in the clashes in and around the K4 area of the city - after appeals for Abdi Qeydid's men to disarm failed.
Mogadishu resident Mohammed Abdirahman told the BBC News website: "I've seen people wounded and dead and the fighting is going on very hard.
"I can hear artillery and guns. It's terrible. People are gathering in one place to find out the news."
Earlier, Somalia's interim Prime Minister Ali Mohammed Ghedi accused extremists within the Union of Islamic Courts of breaking a ceasefire negotiated in Sudan last month.
He said the transitional government would not negotiate with some leading members of the Islamic Courts, branding them terrorists.
He said he would only hold talks with moderate groups and civil society.
Mr Ghedi also urged the UN Security Council to lift its arms embargo on Somalia when it meets on Monday.
He said the weak, UN-backed government needed to be able to buy weapons to be able to restore security in the country, which has not had an effective national government for 15 years.
"We want to re-establish our national security services - train them, equip them," he told the BBC's Network Africa programme.
Both the UIC and the warlords they are fighting claim to have made advances in the clashes in the south of the capital, Mogadishu.
Fighters have been exchanging mortar, rocket and machine-gun fire.
The fighting has focused on the K4 and Medina areas, through which traffic to the south travels. Hundreds of people have fled.
"We were trapped inside our home for three hours, we could not even stand up," because of stray bullets, said Said Yahye, who eventually managed to escape with his three sons.
Mr Qeybdid is backed by another warlord, Hussein Aideed, who was not a member of the anti-terror alliance but is interior minister in the government.
He is from the same sub-clan as Mr Qeybdid.
In Jowhar, one of the towns under the control of the Union of Islamic Courts (UIC), 11 youths convicted of minor offences, such as possessing cannabis and illegal gemstones, were publicly flogged.
This is one of the first such punishments carried out since the UIC took control of Jowhar and other towns, including much of Mogadishu, last month.
The UIC in theory amputate the hands of thieves and stone murderers and rapists to death but such punishments have not been carried out recently.
The US has accused the UIC of having links to al-Qaeda and is believed to have backed the defeated warlords.
Mr Ghedi repeated these accusations - strongly denied by the Islamists.
He singled out Sheikh Hassan Dahir Aweys, who is on a US list of people with links to al-Qaeda.
"Dealing with Sheikh Aweys means dealing with Bin Laden."
He also denied reports that the UIC was in control of most of Mogadishu, saying they control less than 20% of the city.
The weak, UN-backed government is based in Baidoa, 200km from Mogadishu.