Ethiopia's prime minister has played down a seven-day deadline from powerful Islamists to withdraw his troops from Somalia or face a "major attack".
Both sides have been preparing for a conflict
Ethiopia has denied having any soldiers fighting in Somalia but admits sending hundreds of military trainers to help the weak transitional government.
Meles Zenawi said such threats had been made before and he hoped for peace.
There are fears of a regional conflict erupting in Somalia, which could include Ethiopian and Eritrean forces.
The Islamists and government forces, allegedly backed by Ethiopia engaged in fierce clashes for two days last week.
"They have committed aggression against Ethiopia for months now so we do not see any new thing here which requires any new response," Mr Meles told reporters.
"We are trying to get this issue resolved peacefully. If it is not resolved peacefully it will be very unfortunate."
Somalia's Union of Islamic Courts (UIC) has gained control of most of the south and centre of the country this year. The transitional government controls a small area around Baidoa.
Islamist defence chief Sheikh Yusuf Mohamed Siad "Inda'ade" said on Tuesday that the international community should put pressure on Ethiopia to withdraw its troops or they would "be responsible for whatever happens in Somalia".
A government spokesman dismissed the warning, and accused the Islamists of using Ethiopia as a scapegoat while flying in foreign fighters.
A UN report last month accused both Ethiopia and Eritrea, among other countries, of breaking the arms embargo on Somalia.
The UN Security Council then approved plans to send African peacekeepers to protect the government in Baidoa and amend an arms embargo, despite strong opposition from the UIC.
On Monday, both sides said they were sending troops to Tiyeglow, on the main road from the Ethiopia border to Baidoa, following last week's clashes south-west of Baidoa.
Correspondents say the military build-up makes it less likely that any peacekeepers will be deployed.
Uganda, the only country which has publicly pledged to send troops, has said the situation is now too risky.
The United States, Ethiopia and the Somali government all accuse the UIC of working with al-Qaeda - an accusation they deny.
Some Islamists have talked about incorporating Somali-speaking parts of Ethiopia and Kenya into a "greater Somalia".