There were no reported casualties in the clash, which saw only a brief exchange of fire around 7am (0400 GMT) on Wednesday.
Islamic militia commander Yusuf Makaraan said his fighters took control of Beledweyne, the capital of Hiraan region 300km north of Mogadishu, after Yusuf Ahmed Hagar, the Ethiopia-backed, government-appointed governor, allegedly fled to Ethiopia.
"We have full control of Beledweyne," Makarran told AFP by telephone.
"The governor fled and we captured one battlewagon - a pickup truck mounted (with) a machine gun - from his fleeing forces."
"People closed their business centres and are very much concerned that likely renewed clashes between Islamists and Yusuf Hagar clan members" might resume, said resident Mumin Derow.
Fear of attack
The growing influence of the Supreme Islamic Council of Somalia (SICS), which controls much of southern Somalia including the capital Mogadishu, has threatened the authority of the transitional government based in Baidoa, about 250km northwest of the capital.
The Islamists have shown interest in controlling other parts of Somalia, but have denied accusations of planning to raid Baidoa, where Ethiopian troops have been deployed to protect the fragile government.
Prime Minister Gedi refuses to
to hold talks with the Islamists
Residents here expressed fear that Ethiopian soldiers, who are stationed on the border, might attack.
"We are afraid that the former governor might lead to intervention by the Ethiopian force," said Mustafa Aw-Abdi.
"Hagar is not in Ethiopia to worship, he is seeking military support."
"If Ethiopia intervenes militarily to bring back Hagar to power, that will renew more violence," said Ahmed Abdullahi, a shop owner.
"I am sure Ethiopians will come to support their man in Beledweyne. But they can't keep him in power."
The deployment of the Ethiopians in Baidoa and Prime Minister Ali Mohamed Gedi's refusal to engage Islamists in talks has led to mass resignations of ministers, compelling Abdullahi Yusuf Ahmed, the president, to fire the whole cabinet.
The Islamists have refused to participate in Arab League-mediated peace talks in Khartoum until the Ethiopian soldiers pull out, apparently complicating efforts to restore a functional authority in this impoverished, war-torn African nation.
The brief clashes in Beledweyne, which links southern Somalia to the agriculturally rich central regions, came after Hagar refused to formally hand over control to the Islamists.