Hundreds of troops from the transitional government, backed by Ethiopian soldiers, began amassing near Dinsor after the Islamic Courts had seized the town on Saturday without encountering any resistance or firing a single shot.
"Surely Somalia being ruled by the Islamic Courts is better than having no effective rulers"
Derfel, Brighton, UK
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Ethiopia has repeatedly denied that its troops are in Somalia to protect the largely powerless interim government, but it has sent hundreds of military advisers to train security forces.
Earlier, Sheikh Abdullahi Ali Hashi, a spokesman for the Islamic Courts, had told the Associated Press news agency that fighting had begun in Bandiradley, 630km north of Mogadishu, when the Ethiopians "started firing missiles toward our positions".
Witnesses in Dagaari village near Bandiradley said that they saw hundreds of Ethiopian troops and tanks take up positions near the town with militiamen from the northeastern semi-autonomous region of Puntland.
A spokesman for the Puntland forces said they were provoked into fighting by the Islamic Courts firing rockets and mortar shells at them.
The violence came two days after the UN approved a plan to send peacekeepers to the country.
Abdulrahman Said Dhegaweyne, the Puntland commander, said: "Our forces repulsed Islamic fighters who tried to ambush us ... we seized small arms from them as they fled."
"One of our troops died of wounds ... but we also killed one of their own," he added.
At least three people have been killed since the two sides clashed for the first time on Wednesday just hours after the UN Security Council authorised the deployment of an 8,000-strong peacekeeping force and eased a 14-year-old arms embargo.Demonstration
Islamic Courts leaders used Friday's demonstration to call for that decision to be reversed and warned of attacks on the force.
But Ali Jama, the information minister for the largely powerless interim government, dismissed the threats.
"They are bluffing ... the Islamic Courts cannot be against the whole world, what do they think they can do?" he said.
Kofi Annan, the UN secretary-general, has called for calm, saying the peacekeepers were not entering Somalia as "an invasion force".