Ethiopian troops are in Somalia, United Nations envoy Francois Fall has confirmed after a one-day trip there. But he told Reuters news agency reports of 4,000-5,000 troops were exaggerated.
The Islamic militias have taken control of much of southern Somalia
Ethiopia backs the weak transitional government based in Baidoa. They accuse Eritrea of arming the Union of Islamic Courts, who are running the capital.
There are fears that Somalia could end up a battleground for a proxy war between Ethiopia and Eritrea - who fought a two-year border war.
Analysts say neither Eritrea nor Ethiopia would want to see a regime in Somalia hostile to their interests.
Both the Ethiopian government and the weak transitional government have refused to confirm the presence of Ethiopian troops on Somali soil.
Earlier, the United States called on the UIC, which controls much of southern Somalia, to resume talks with the country's interim government.
But Islamic court leaders have ruled out further discussions while Ethiopian troops remain in Somalia.
The Islamist militia walked out of talks in Sudan's capital, Khartoum, last week before they got under way after the Ethiopians crossed the border in support of the government.
President Abdullahi Yusuf's government has little influence outside its base in Baidoa, but has the diplomatic support of the UN and the African Union (AU) and the strong backing of neighbouring Ethiopia.
Mr Fall said that the indication are that there are some Ethiopian troops around Baidoa and some in Wajid - another central town.
"The Ethiopians are justifying their presence inside Somalia for their own security
"They're saying that some Ethiopian dissidents are in the ranks of the Islamics and those are ready to fight Ethiopia," he said from his office in the Kenyan capital, Nairobi.
Meanwhile, the AU has re-iterated its support for sending a peacekeeping force into Somalia.
At its meeting on Monday, the AU's Peace and Security Council called for the deployment of peacekeepers as soon as possible.
President Yusuf has repeatedly called for troops to be sent to bolster his government.
But the UIC strongly opposes their deployment.
Mr Fall had talks on Monday with the government in Baidoa and Islamic leaders in Mogadishu, in an effort to get them to resume talks and avert a possible war.
He called on neighbouring countries to exercise maximum restraint and "not to interfere at this particular moment in Somalia".
He also praised the impact of the Islamic courts on the streets of Mogadishu - where road blocks or gunmen are now not seen on every street corner.
"I take note that [the UIC] has achieved great things in Mogadishu. I have seen it," he said.