Islamic courts fighters were reportedly preparing to defend Jilib and Kismayo, having quietly evacuated Mogadishu, the capital, earlier in the week.
"I tell you there is very high tension and the waves of war are coming towards us," Sheikh Abdi Dayow Abdi, a Jilib district commissioner, said.
"Fighters have already taken positions in the surrounding areas and they have vowed to defend the district.
"We are getting information that forces are approaching the town. I think fighting will take place in the coming days, if not hours."
"The Somali UIC made miracles to bring peace and stability but the world is choosing to go for the so-called government just because of Islamophobia"
Xaqudirir, Mogadishu, Somalia
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By early Sunday, the government and Ethiopian troops, riding in 16 Ethiopian tanks, and accompanied by armoured vehicles and artillery, were 120km north of the front line town of Jilib.
As they headed southwards they were met by as many as 2,000 civilians fleeing the expected fighting.
"The Islamic militia told us they are committed to defend the town to the death, so we have no other option but to flee," Ilse Ali Ilweyn, a father of six who lives in Jilib, said.
Jilib is the first line of defence for the Islamic group and gateway town to Kismayo, the large southern port city 100km further south which is the last major Islamic courts stronghold.
"I want to tell you that the Islamic courts are still alive and ready to fight against the enemy of Allah. We left Mogadishu in order to prevent bloodshed ..."
Sheikh Sharif Sheikh Ahmed A leader of the Islamic Courts Union
The Union of Islamic Courts, the umbrella group for the Islamist movement that ruled Mogadishu for six months, has pledged to continue fighting.
"I want to tell you that the Islamic courts are still alive and ready to fight against the enemy of Allah," Sheikh Sharif Sheikh Ahmed, the group's leader, told residents in Kismayo Saturday.
"We left Mogadishu in order to prevent bloodshed in the capital, but that does not mean we lost the holy war against our enemy."
"We decided to fight the enemy in every area," Ahmed told Al Jazeera on Sunday.
Members of the Islamic courts say they still have armed supporters in Mogadishu.
On Saturday night an unexplained blast in the capital killed a woman and wounded two others.
Government takes control
The Somali government - which only two weeks ago was encircled by Islamic fighters in the town of Baidoa - has begun to build up a functioning government in and around Mogadishu.
|Re-building war-ravaged Somalia will be a challenge for any government [AFP]|
Senior members of the government - which is recognised as Somalia's legitimate government by the United Nations and the African Union - began meeting local and tribal leaders in and around Mogadishu on Sunday.
"We should go about re-civilising our country and return to live as we used to in former days," Ali Muhammad Gedi, the prime minister, told Al Jazeera.
The leaders of the Islamic courts said they were willing to negotiate with the Somali government but they said that Ethiopian troops must leave the country.
Somalia has not had a functioning central government since 1991.