Ali Yasin Geddi, the vice-chairman of Elman Peace and Human Rights group, said: "At least 14 people died and 32 others were injured in Warhole. Most of the casualties are fighters from both groups."
"So far 250 families, mostly pastoralists have fled and there is fear fighting might spread to other areas."
Al-Shabab is fighting to enforce a strict interpretation of Islamic law (sharia) in the country against the more moderate version proposed by the government.
Al-Shabab controls large parts of the south and centre of the Horn of Africa nation, and there has been no operational central government since 1991.
The two sides have been fighting over the past week, with dozens of fighters dying.
Ahlu Sunna, a Sufi Islamic group, does not completely endorse the transitional government headed by Sharif Ahmed, but has vowed to carry out an armed struggle to dispel the ideology of al-Shabab from the country.