Ethiopia has for the time said its troops are fighting Islamic militiamen that control much of Somalia.
Ethiopia's information minister said his country's forces had launched "self-defensive measures" against the Islamic Courts Union (UIC).
Ethiopia had previously admitted to sending only army trainers to Somalia.
In the latest fighting between the UIC and the weak, Ethiopian-backed government, air strikes and shelling are being reported in border areas.
On Sunday eyewitnesses said Ethiopian fighters were bombarding the UIC-held town of Beledweyne near the border, on the fifth day of renewed fighting.
"The enemy of Allah has started bombing our civilians," Sheikh Hassan Derrow told AFP news agency.
[Ethiopia] has started counter-attacking the aggressive extremist forces of the Islamic Courts and foreign terrorist groups
A resident told AFP: "We see planes striking us and heavy fighting on the ground intensifying."
Ethiopian Information Minister Berhan Hailu later said: "The Ethiopian government has taken self-defensive measures and started counter-attacking the aggressive extremist forces of the Islamic Courts and foreign terrorist groups."
The UIC has vowed to drive out Ethiopian troops which it says have been fighting alongside government forces for months.
The Islamic group - which controls most of the south, including the capital, Mogadishu - on Saturday appealed for foreign fighters to join them in a "holy war" against Ethiopia.
The conflict is also reported to have spread to the Galkayo area further north.
Both sides say they have killed hundreds of people since the fighting began on Tuesday - although aid agencies report dozens of dead.
The recent clashes have heightened fears of a regional war.
The UN estimates that at least 8,000 Ethiopian troops may be in the country, while rival Eritrea is said to have deployed some 2,000 troops in support of the Islamic group.
However, Eritrean President Isaias Afewerki denied his country had troops deployed in Somalia.
Eritrea refutes its involvement in Somalia clashes
The Eritrean president Isias Afawerki has on Saturday strongly blamed the Ethiopian government that it wants to occupy Somalia and distanced an allegation that Eritrean troops are fighting alongside with the Islamic Courts Union.
In an interview with Al-Jazeera TV channel this morning, the Eritrean president Isias Afawerki condemned the Ethiopian fighting forces in Somalia as occupiers.
“The presence of an Ethiopian soldier inside Somalia means that Ethiopia wants to capture Somalia,” said Mr. Afawerki. “This is clear violation to the territory of Somalia and Ethiopia should keep out of Somalia,”
The Eritrean president, whose country is hostile with Ethiopia, denied that Eritrean troops are staying in Somalia and fighting alongside with the Islamists. “We have no soldiers in Somalia and my government is condemning the Ethiopian involvement in Somalia clashes,”
Mr. Afawerki made it clear that Ethiopia is responsible for the insecurity in Somalia helping the interim government based in Baidoa city, 240km southwest of the Somalia capital Mogadishu.