Ethiopian and Somali troops are reported to be heading south towards the stronghold of Islamist fighters driven from the capital on Thursday.
There is fierce opposition to Ethiopia in northern Mogadishu
Ethiopian tanks are advancing to the port city of Kismayo, 500km (300 miles) south of Mogadishu.
A senior figure in the Union of Islamic Courts (UIC) has vowed that the group is still alive and ready to fight.
The head of Somalia's transitional government has met clan leaders to discuss how to stabilise the capital.
Somali President Abdullahi Yusuf, who has not yet entered Mogadishu, held the talks in the nearby town of Afgoye.
Some are opposed to Ethiopia's role in Somalia and thousands have protested in Mogadishu as Ethiopian soldiers secured the city's port and airport.
The Ethiopian forces, who back Somali's transitional government, are now reported to be closing in on an estimated 3,000 Islamist fighters in Kismayo.
The BBC's Africa correspondent, Peter Biles, says that the Islamists could find themselves trapped between Kismayo and the Kenyan border.
Sheikh Sharif Ahmed of the UIC urged thousands of residents gathered in Kismayo stadium to celebrate the Muslim festival of Eid to defend their country.
"Our country is under occupation so we have decided to fight. We are gearing up to kick these occupiers out of our country."
Residents of Kismayo were reported to have seen Ethiopian fighter jets overhead on Friday and Saturday, Reuters reported.
In Mogadishu, Ethiopian-backed troops have already taken control of the UIC's headquarters in the north and the former US embassy compound in the south.
The African Union has called for Ethiopian forces to leave Somalia, but the United Nations Security Council failed to agree on a statement calling for the withdrawal of all foreign forces.
Much of Somalia faces food shortages because of recent heavy floods.
The UN estimates that about 30,000 people have been displaced during the fighting, and causalities have been high.
The UIC assumed control of the capital in June, driving warlords out and rapidly extending their influence to much of southern Somalia.
Some analysts say the UIC's popularity stemmed from their ability to transcend clan enmities that have bedevilled Somalia since the overthrow of former President Mohamed Siad Barre in 1991.
Almost all Somalis are Muslim, and after years of lawlessness many were happy to have some kind of law and order under the UIC.