Hasan Mudey, who owns a grocery shop in the area, told AFP: "Five civilians died when an artillery shell landed in small restaurant near Fagah junction. There were pieces if human flesh and blood everywhere."
The clashes started early in the morning, with Ethiopian troops moving into the northern district of Huriwaa.
The interim Somali government called on Ethiopian troops to fight alongside its forces against the Islamic Courts Union after the union gained control of much of the country in late 2006.
Thousands of Somalis have died in the fighting made more complicated by clan loyalties, corruption and the involvement of long-time enemies Eritrea and Ethiopia.
The capital now suffers almost daily clashes and hundreds of thousands of people are homeless as they flee the bloodshed.