Heavy fighting is being reported on at least two fronts near the weak Somali interim government's base in Baidoa.
A deadline from Islamists for Ethiopia to withdraw troops from Somalia or face "major attacks" expired on Tuesday.
Residents say pro-government forces and the Islamic militia exchanged mortar shells at Burhakaba, 25km from Baidoa.
A European Union envoy is in Baidoa meeting officials. There are fears an all-out war would plunge the entire Horn of Africa region into crisis.
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