The Somali government's capture of the town represented a rare strike back against the newly powerful Islamic Courts Union by the chaotic country's fragile internationally recognised interim administration.
The seizure of the town prompted hundreds of men to converge on the nearby town of Lego, vowing to attack the government forces if they did not withdraw.
Aljazeera television has reported that residents have begun fleeing as the fighters threatened to launch a counter-attack to recapture the town.
The Islamists have accused Ethiopian troops of supporting the government's forces.
"The Ethiopians have attacked Bur Hakaba and if they don't leave, we will attack them," Sheikh Yusuf Mohamed Siad, the Islamists' commander, told Reuters.
"Ethiopia and its allies are against the peace we have brought to Somalia after 16 years of unrest," Siad said as his battlewagons - trucks mounted with heavy machine guns and anti-aircraft rockets - rumbled through Lego.
"If these attacks continue, we will ask other Islamic nations to help us."
The Islamists have declared a jihad against Ethiopia, which has denounced them as terrorists.
Sunday's stand-off was the closest the two sides have come to a full-scale confrontation.
Somalia's interim government has said its forces will not leave Bur Hakaba and has repeatedly denied receiving Ethiopian help, even though residents say Addis Ababa has sent thousands of troops over the border to support the weak administration.
The Islamic Courts Union now controls much of the south
Islamist forces were said on Sunday to be within 15km of Bur Hakaba, but there were no immediate reports of fresh fighting there.
The capture of Bur Hakaba would put the Islamic Courts Union within 30km of Baidoa.
One businessman, Abdulkadir Nur, said: "The whole town is worried and we don't know what direction we will flee when this war breaks out."
One resident of Bur Hakaba contacted by telephone said the town was quiet but tense, and that most shops had stayed shut.
"Some resident have fled towards the neighbouring villages for fear of stray missiles and bullets once fighting starts," Ali Iman told Reuters.
"There is a very highly possibility of a clash. The troops are facing off."
Meanwhile further southwest, residents said Islamist troops clashed with militia loyal to the government's defence minister Barre Hiraale in a remote village 20km north of Buale.
Since June, the Islamists have taken control of Mogadishu, the Somali capital, and much of the south of the country.
The rise of the Islamists threatens the government's attempts to reimpose central rule on a country in chaos since its last functional government was overthrown in 1991.