Somali government forces backed by Ethiopian troops and tanks have attacked Islamist fighters near their final stronghold town of Kismayo in the south, forcing them to retreat.
Islamist commanders said rival troops, backed by tanks and trucks, had taken control of Jilib township, about 100 kilometres north of Kismayo.
"We have retreated back from the town and the Ethiopian invaders have taken control of Jilib," Islamist commander Dahir Hashi said. "But we are going to counter attack."
A resident said he saw Islamist pick-up trucks mounted with machine guns speeding to Kismayo from the frontlines.
Somalia's deputy defence minister, Salad Ali Jelle, said the joint government and Ethiopian forces on the ground outnumbered the Islamists in Jilib by more than two to one.
"The Islamists are very weak now," Jelle said.
Islamist leaders had regrouped their forces in Jilib and Kismayo after abandoning the capital Mogadishu on Thursday on the face of Ethiopian firepower.
Deputy Prime Minister Hussein Aidid, a former Mogadishu warlord, urged Islamist leaders to surrender, disarm and avoid more of the fighting that has killed hundreds, and possibly thousands, in the lawless African nation.
"We will surround them but we will leave open (an opportunity) for dialogue and negotiations for them to disarm," Aidid said.
So far, the offer of peace talks has fallen on deaf ears, with the Islamist leaders refusing to discuss surrender.