The US and France have urged Ethiopia and Eritrea to show restraint and to find a negotiated solution to their differences, after Ethiopian forces carried out a cross-border raid.
"We have heard the government's reports that its forces struck military posts inside Eritrea today," Victoria Nuland, the state department spokeswoman told reporters on Thursday.
"We are obviously calling on both sides to exercise restraint and to avoid any further military action."
An Ethiopian spokesman said that his government's forces had attacked an Eritrean military base, claiming that it had served as a rear base for gunmen involved in the killing of five European tourists earlier this year.
Bernard Valero, the French foreign ministry spokesman, said in a statement: "France urges both states to avoid military escalation and, more broadly, to avoid raising tension. France believes the only way of resolving the dispute between the two countries is through dialogue and negotiation."
Valero said the incursion had targeted camps "which Addis Abeba accuses Asmara of using to train rebel groups operating on Ethiopian territory".
Eritrea has dismissed these claims saying that it will not retaliate against its neighbour. It termed the allegations that it harbours armed groups against Addis Ababa as a "baseless and bogus lie".
"It is those who do not know the price of war who are hungry to go to war," Ali Abdu, the Eritrean information minister, told AFP news agency by telephone.
"We fought enough for 30 years, and we will never be dragged into war through such hostile provocations as this."
"We do not support such groups, as these are the products of Ethiopia's own internal crisis and the result of a policy of exclusion and marginalisation," he added.
Thursday's attack was the first offensive by Ethiopian troops inside Eritrea since the end of a 1998-2000 war that killed 70,000 people and still festers. The frontier dispute that ignited the conflict remains unresolved.
Ethiopia routinely accuses Eritrea of supporting Ethiopian separatist groups.
Ethiopia has blamed an Eritrea-based rebel group for the kidnapping of Westerners in its northern Afar region in 2007, and again for attack in the same area in January.
"Our national defence force has today taken measures against military posts inside Eritrea in which subversive and anti-peace elements were trained," Shimeles Kemal, a government spokesman, told the media.
Gunmen killed two Germans, two Hungarians and an Austrian in an attack on a group of tourists in the remote Afar region on January 17, and seized two Germans and two Ethiopians.
The rebel group in the Afar region said last week it had freed the two German tourists, although there has been no official confirmation of the release.
"These groups are operating in the Afar area. We know for certain that the Eritrean government harbours, supports, trains and deploys subversive groups that occasionally launch attacks on civilian and infrastructure targets inside Ethiopia," Kemal said.
He added that Ethiopian soldiers attacked three places about 16km inside southeastern Eritrea.
"We will continue our measures as long as they remain a launching pad for similar attacks," he said.
Eritrea does not receive foreign aid and is sanctioned by the UN because of human rights violations.
UN reports have indicated that Eritrea has supported the al-Qaida-linked al-Shabab. Eritrea has denied those accusations.