Peace talks between Somalia's transitional government and Islamists have been postponed, mediators in the Sudanese capital, Khartoum, say.
The talks have been placed on indefinite hold after the two sides refused to meet face-to-face, a statement said.
The mediators called for restraint but a government spokesman ruled out any early resumption of talks.
Observers now fear a conflict which could engulf the entire region.
Ethiopia backs the government while its rival Eritrea has been accused of arming the Union of Islamic Courts (UIC).
Both countries deny reports they have troops in Somalia.
'Nonsense'
Somali Foreign Minister Ismael Mohamoud Hurreh told the BBC that his government hoped to avoid war but warned that conflict would become inevitable if Somalia's Union of Islamic Courts (UIC) continued on their current path.
"There is a lot of hyperbole of the Islamic Courts being invincible... That is nonsense"
The minister said countries in the region were deeply concerned about the UIC's declaration of jihad, or holy war, on their neighbours.
While the UIC has gained control of most of southern Somalia in recent months, Mr Hurreh said they were not as strong as many believed.
"There is a lot of hyperbole and portrayal of the Islamic Courts being invincible, a strong military organisation. That is nonsense," he said.
UIC delegate in Khartoum Ibrahim Hassan Adow told the BBC that the Islamists remained "committed to dialogue".
"Our message is for the government not to invite enemies of the Somali people."
Before arriving in Khartoum, the Islamist delegation said they would not take part in the talks unless Ethiopian troops left Somalia.
Ethiopia admits having hundreds of military trainers with the government.
These are the third round of talks the Arab League has organised in Khartoum.
Restraint
With neither side willing to accept the other's pre-conditions for talks, international mediators called on both parties to exercise restraint.
"The parties are urged to commit themselves to previous agreements reached in Khartoum," their statement said.
The two sides have previously agreed a ceasefire but the UIC has continued to gain ground.
The UIC has rapidly taken control of most of southern Somalia since seizing the capital, Mogadishu, in June.
The government only controls the territory around Baidoa, 250km (150 miles) north-west of Mogadishu.
Somalia has been in the grip of warlords and militias for years and has not had a functioning national government since 1991.
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