Somalia's Islamist militia are reported to have withdrawn from frontlines after a sustained assault by government forces backed by Ethiopian troops.
The Islamic militia say they are digging in for a long war
Ethiopian jets fired at Islamist positions for a third day on Tuesday.
The Union of Islamic Courts described its pullout as a change of tactics in what it vowed would be a long war.
Fighting between the Ethiopian-backed interim government and the UIC flared last week. The Red Cross is treating more than 600 civilians and combatants.
It has called on all sides to respect the rights of the injured and prisoners.
Earlier on Tuesday, the African Union (AU) said Ethiopia had the right to intervene militarily in Somalia as it felt threatened by the Islamic militia operating there.
An AU official also acknowledged the body had failed to "react properly and adequately" to the Somali situation.
The town of Burhakaba, one of the Islamists' main bases, is reported to have fallen to forces loyal to Somalia's interim government.
In recent days, the area around the town - which is close to Baidoa, the government's HQ - has been the focus of heavy fighting involving tanks and artillery.
As UIC fighters retreated on Tuesday, they came under fire from Ethiopian jets.
Speaking from Burhakaba, the Somali deputy defence minister, Salad Ali Jele, told the BBC the government aimed to extend its control across the whole country.
"The people [in Mogadishu] are already expecting us," he said.
"We call on the Islamic Courts to surrender... Mogadishu is the capital. It is our duty to go there."
Islamist fighters are also reported to have withdrawn from other areas in central and southern Somalia.
But a leading UIC official, Sheikh Sharif Sheikh Ahmed, told reporters in Mogadishu that the retreat merely signalled a new phase in the war.
"Since Ethiopia started using air power and heavy artillery, we have changed our tactics and are getting ready for a long war," he said.
On Sunday, Ethiopia admitted for the first time its troops were fighting in the country, saying it was forced to defend its sovereignty against "terrorists" and anti-Ethiopians.
The UN estimates at least 8,000 Ethiopian troops may be supporting the transitional government.
Patrick Mazimhaka, the deputy chairman of the AU's Commission, told the BBC the African Union would not criticise Ethiopia as it had "given us ample warning that it feels threatened by the UIC".
The African Union would meet in two days to discuss the situation, he said.
"The African Union must plan to get a force to intercede and stabilise the situation," Mr Mazimhaka said.
But Sheikh Ahmed told the BBC the AU should not take sides.
"This is unsurpassed stupidity. Is it okay for any government that feels under threat to go and invade its neighbours?
"The Islamic Courts came to restore security and stability in Somalia. Therefore, we feel that all the problems in Somalia have been planned by the African Union."
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