"[We call on] the UN security council to impose sanctions on the government of Eritrea without any further delay."
Igad is made up of Djibouti, Ethiopia, Kenya, Somalia, Sudan and Uganda. Eritrea suspended its membership in 2007, blaming the bloc for failing to bring peace to the region.
Mahboub Mahlim, the Igad secretary-general, told the meeting that the region had failed support the interim Somali government, calling the security situation "very grave".
"It is no longer a war between Somalis, but a war against Somalia, a war against all of us," he said during the talks.
"We don't interfere [in Somalia] and we don't want to see any terrorism prevail in Somalia."
Accusations of Eritrean interference in Somalia has been around for several years, and the UN has ordered an inquiry.
Somalia's government has accused Eritrea of supporting al-Shabab with plane-loads of AK-47 assault rifles, rocket-propelled grenades and other weapons.
Isaias Afwerki, the Eritrean president, denies the claims, saying it was the work of CIA agents in the region bent on blackening his government's name.
"We don't interfere [in Somalia] and we don't want to see any terrorism prevail in Somalia," Reuters news agency quoted him as saying.
"It's CIA operatives ... these people are liars."
Armed groups, including al-Shabab, have gained ground during two weeks of Somalia's fiercest fighting for months.
Local human rights workers say the clashes have killed at least 175 civilians and wounded more than 500. About 45,000 others have been displaced.
Jean Ping, the head of the African Union, attended the Igad meeting and renewed calls for a UN-sponsored peacekeeping force in Somalia.
The situation is "deteriorating ... due to an unprecedented level of violence in Mogadishu," Ping said.
A UN security council delegation over the weekend said conditions have not yet been met for deploying UN peacekeepers in Somalia.
Ethiopian troops, which entered Somalia in 2006 to support the government, announced their withdrawal earlier this year.
But on Tuesday, residents said they saw Ethiopian troops in armoured vehicles patrolling a Somali border town.
Seyoum Mesfin, Ethiopia's foreign minister, denied reports that soldiers had returned.
"We are not back in Somalia," he said after the Igad meeting.
"We don't intend to go to Somalia unilaterally. We will continue to follow up developments and do everything possible that this legitimate and sovereign government of Somalia is supported and assisted."
Mesfin warned against delayed intervention to help the weak interim government.
"Extremists are not interested in peace. Their agenda has nothing to do with the stabilisation of Somalia. Their plans are going beyond Somalia," he said, adding their leaders "are making it clear that their objectives are not limited to Somalia."