Eritrean troops are in a prohibited buffer zone on the border with Ethiopia to harvest crops, says Eritrean Information Minister Ali Abdu.
The UN said Eritrea's move breached the 2000 peace deal
UN officials said 1,500 troops and 14 tanks entered the zone on Monday.
UN spokesman Stephane Dujarric said the incursion constituted "a major breach of the ceasefire" and could jeopardise the peace process.
The temporary buffer zone is part of a peace deal signed by the two countries in 2000 to end a two-year border war.
Mr Abdu said the soldiers went to the region every year at harvest time.
"If the harvest is not taken, it will be lost with severe consequences for our food security programme," he said.
Dec 2000: Peace agreement
Apr 2002: Border ruling
Mar 2003: Ethiopian complaint over Badme rejected
Sep 2003: Ethiopia asks for new ruling
Feb 2005: UN concern at military build-up
Oct 2005: Eritrea restricts peacekeepers' activities
Nov 2005: UN sanctions threat if no compliance with 2000 deal
When asked by AFP news agency why they had tanks, he said that if soldiers move they "have to take their equipment".
The United Nations Mission in Ethiopia and Eritrea (Unmee), which has more than 2,000 troops in the zone, reported the move.
It said Eritrean forces also took over one of its checkpoints in the buffer zone.
Mr Dujarric said UN Secretary General Kofi Annan was concerned.
"This is a very troubling development, and he calls clearly on the government of Eritrea to withdraw its troops from that zone immediately," Mr Dujarric told the BBC.
Eritrea has placed restrictions on the UN operation since last year in response to Ethiopia's failure to withdraw from the disputed town of Badme.
An international arbitration commission awarded Badme to Eritrea in 2002.
But Eritrea has become increasingly frustrated with the failure of Ethiopia to accept the decision. It banned western UN staff from Eritrea last year.
Mr Abdu said that if Ethiopia had accepted the decision, civilian farmers and not soldiers would be harvesting the crops.
A spokesman for Ethiopia says they are monitoring the situation in the demilitarised zone very closely.