Islamist insurgents have taken over about one-third of Mogadishu
The African Union has urged the UN Security Council to impose sanctions against Eritrea for supporting Islamist insurgents in Somalia.
It is the first time the AU has called for sanctions against a member state. Eritrea rejected the accusation and suspended its membership of the union.
The AU has about 4,000 troops in Somalia supporting the fragile transitional government.
Meanwhile heavy fighting flared up again in the capital, Mogadishu.
At least two people were killed and several wounded in a second day of clashes between government forces and Islamist insurgents, eyewitnesses say.
At least 45 people were reportedly killed on Friday, when the government launched an offensive aimed at regaining control of parts the city taken by militants.
The BBC's Martin Plaut says the AU's call for sanctions against one of its member states is an unprecedented development.
The AU is normally reticent in any direct criticism of its membership, our correspondent says.
A statement from the 53-member organisation said the UN Security Council should "impose sanctions against all those foreign actors, both within and outside the region, especially Eritrea, providing support to the armed groups".
The AU also calls for the imposition of a no-fly zone and a blockade of sea ports "to prevent the entry of foreign elements into Somalia".
The UN has already expressed concern about the flow of arms into Somalia, where hard-line Islamists of al-Shabab and Hisbul-Islam are battling for control of Mogadishu.
Somalia has been subject to a UN arms embargo for many years but weapons are still freely available in the Mogadishu weapons market.
Eritrea's Information Minister, Ali Abdo, said his government was not concerned by the African Union decision, describing the organisation as toothless.
Mr Abdo said the accusations about Eritrea were an invention of American intelligence.
"This is a fabrication which is distributed by the CIA agents and the African Union is simply repeating the statement which is put in its mouth," Mr Abdo told the BBC.
He added: "We suspend our membership because of this irresponsible act of the African Union".
Although Eritrea denies arming Islamist forces, insurgent leader Sheikh Hassan Dahir Aweys has reportedly claimed that the country supports their fight.
In an interview with Reuters news agency, he said: "Eritrea supports us and Ethiopia is our enemy. We once helped both countries but Ethiopia did not reward us."
Somalia currently has a moderate Islamist President, Sheikh Sharif Sheikh Ahmed, who was elected by a unity government in January as part of a UN-backed peace initiative.
However, Islamists have recently gained ground and control much of the south. Last week the transitional government also lost control of about one-third of Mogadishu.
Somalia has been mired in civil war for 18 years.