Somalia's powerful Islamist group has dismissed US allegations that its leadership is dominated by al-Qaeda.
Both sides have been preparing for war
US Assistant Secretary of State Jendayi Frazer said radical forces had sidelined more moderate forces in the Union of Islamic Courts (UIC).
But a UIC spokesman said the US was trying to derail the stability it had brought to much of Somalia this year.
As tensions rise between the UIC and the weak interim government backed by Ethiopia, fears of a regional war grow.
Ms Frazer warned against a military solution and said the way ahead should be through talks between the two sides.
Arab League-mediated talks are scheduled to take place next week in Khartoum, but neither side has confirmed that they will attend.
Divide and rule
"The top layer of the courts are extremists to the core, they are terrorists and they are creating this logic of war," Ms Frazer told reporters in Washington.
But UIC spokesman Sheikh Abdurahim Ali Muddey said the accusations were nothing new and were an attempt to divide the group.
"I can assure you again that the Islamic courts are not a threat to anybody and America is just intending to derail stability in Somalia," he told AFP news agency.
"I assure you that we have only one motive and that is we need our country safe and at peace."
The US, Ethiopia and the Somali government have all accused the UIC of working with al-Qaeda.
The UIC has taken control of much of southern Somalia, including the capital, Mogadishu, since June.
The government only controls the territory around the town of Baidoa.
On Tuesday, the Islamists gave Ethiopian troops it says are backing the government a week to leave the country or face a "major attack".
Ethiopia has denied having any troops fighting in Somalia but admits sending hundreds of military trainers to help government forces.
Mrs Frazer warned that the Islamists were receiving funding from Eritrea, Yemen, Egypt and Saudi Arabia.
Last week, the UN Security Council approved plans to send peacekeepers to protect the government in Baidoa and amend an arms embargo, despite strong opposition from the UIC.
But correspondents say a military build-up on both sides makes it less likely that any peacekeepers will be deployed.
Both sides said this week that they have been sending troops to Tiyeglow, on the main road from the Ethiopia border to Baidoa, following clashes south-west of Baidoa.