Eritrea said its larger southern neighbour had launched an offensive in the heavily militarised border area of Badme and was deploying helicopter gunships to back up ground forces.
Ethiopia said it was attacked first but had beaten back an assault on its military post in Badme and was strengthening its position. It also said Eritrea had started shelling on another front farther east.
In New York, the United Nations Secretary-General, Kofi Annan, called on the two Horn of Africa nations to stop fighting and find a peaceful solution. "The alternative, continued fighting, is completely unacceptable to the international community," he said.
The UN, the United States and the Organisation of African Unity have tried but failed to resolve the conflict despite shuttle diplomacy between Asmara and Addis Ababa in recent weeks. The German Foreign Minister, Joschka Fischer, also urged the countries to take steps to prevent a major conflict.
He urged them not to break a moratorium on air strikes. Germany currently holds the rotating EU presidency. "If this conflict is not brought to a swift end, progress that has taken decades to build up will have been destroyed in a very short space of time."
Both sides claim to have gained the upper hand. Eritrean officials said hundreds of Ethiopian soldiers were killed and 100 taken prisoner as two brigades were put out of action and two others were heavily battered. "The Ethiopian attacks ... seem to have petered out," an Eritrean spokesman told a news briefing in Asmara yesterday, although more fighting was expected. "We have indications the Ethiopians are regrouping and might possibly launch an attack on other fronts," he said.
In Addis Ababa, the government said its troops had inflicted heavy casualties on the Eritreans whom it accused of shelling the northern Ethiopian town of Adigrat. A government spokeswoman said seven civilians were wounded and three houses destroyed.
She described the shelling as a "desperate attempt to compensate for its losses on the battlefield in the disputed Badme front" and said Ethiopian forces had captured Geza Gerlase, "a strategic Eritrean military post that commands control of Badme plain".
Badme is a rocky triangle of land at the western end of the border and was occupied by Eritrea during war last May and June. Hundreds of soldiers and dozens of civilians were killed after fighting broke out along three fronts. The two sides agreed to a moratorium on cross-border air raids in June but have since reinforced their positions along the 625-mile border and all efforts to negotiate a peaceful settlement have failed.
Britain and Germany have advised their nationals to leave Eritrea as the government told people to stay indoors because of possible Ethiopian air raids against Asmara. But the capital appeared calm yesterday.
Ethiopia's state-owned airline announced that it was moving its headquarters from Addis Ababa to neighbouring Kenya as a precaution against bombing. The move means the carrier's aircraft will stay overnight in Kenya or other countries rather than Addis Ababa.
t The man who in January 1941 led the French cavalry's last charge on horseback has died, aged 85.
Lt-Col Jean Ballarin was a non-commissioned officer in a Spahis (French North African Arab light cavalry) unit fighting alongside British forces in Eritrea when he led the charge, sabre drawn, against Italian troops at Umberga. It went down as the last flourish of a romantic though bloody tradition.
Ballarin participated in the capture of Hitler's Bavarian mountain retreat in 1945 and was awarded the Cross of the Liberation, given to the most deserving members of the French Resistance.