Some 40 heavily armed fighters have attacked an Ethiopian base close to the Somali capital, Mogadishu.
There are more arms in Somalia than ever before, the UN says
At least four people died in the fighting, with heavy machine guns and rocket-propelled grenades.
The gunmen arrived in five vehicles and begin attacking the base, shouting "God is great", an eyewitness said.
Islamists and other insurgents strongly oppose the presence of Ethiopian troops in Somalia who are backing the country's interim government.
Last December, the allies ousted the Union of Islamic Courts (UIC), an Islamist group that had taken control of much of southern Somalia.
Violence has surged in city since national reconciliation talks began earlier this month - spurring more than 10,000 residents to flee in recent weeks, the UN says.
"The sounds of gunfire rocked our entire residence and created fear among us," local resident Asha Ilmi Mumumed told the BBC about the attack, which lasted for an hour.
At least three civilians are reported to be among the dead, including a four-year-old child.
Doctors at the city's main hospital said one government soldier was killed.
The BBC's Mohammed Olad Hassan in Mogadishu says it is the heaviest fighting in the city since the peace talks started.
"Terrorists and remnants of the courts and insurgents, who are not happy with any kind of administration in Somalia are always behind such attacks," said Deputy Defence Minister Salad Ali Jelle.
Our correspondent says two other children and their father died in the central town of Beledwein when Ethiopian troops fired into the town after their convoy reportedly hit a landmine.
"They were killed when an artillery round landed on their house," their neighbour Abdi Adow told the BBC.
"Another two children of the same family and their uncle were wounded," he said.
Last week, the UN accused Ethiopia's rival, Eritrea, of supplying arms to the Islamists - claims denied by Eritrea.
African Union troops have been destroying weapons in Mogadishu
The UN report believes there are now more arms in Somalia than at any time since the civil war started in 1991.
UIC leader Sheikh Sharif Sheikh Ahmad said the report's claims are false.
"We have not received any weapons from Eritrea. Weapons are in abundance in Somalia," he told the BBC's Arabic service.
The UN report also accused Ethiopia of using the controversial weapon white phosphorus in Somalia.
The Geneva Conventions ban the use of white phosphorus, which causes chemical burns, as an incendiary weapon against civilian populations and in air attacks against military forces in civilian areas.
Ethiopia's ambassador to the UK, Berhanu Kebede, said the accusations were "absolutely wrong" and designed to tarnish the image of Ethiopian troops.
He also disputed the report's claim that Islamist fighters in Somalia still posed a serious threat.
"Mogadishu is as peaceful as any capital in Africa," he told the BBC's Focus on Africa programme.
He said that with the launch of national reconciliation talks, Somalia was on track to restoring stability.