The loss of Beledweyne would deal a blow to the Shebab insurgents who control large parts ofsouthern Somalia but are facing increasing pressure from government forces and regional armies.
But the hardline Shebab group denied it was defeated in Beledweyne, a strategic town about 30 kilometres (20 miles) from the Ethiopian border in the Hiran region of central Somalia.
“The fighting started this morning after our forces supported by the Ethiopian military attacked the enemy’s positions on the outskirts of Beledweyne,” Somali government official Bare Abdulahi said from the scene.
“They lost in the battle and we have penetrated into their barracks, killing nearly 20 of their fighters before taking control of the city,” he added.
“The Somali government forces alone entered the city and they are securing it now.”
The Al-Qaeda-linked Shebab have been battling Kenyan forces in the south and African Union and government forces in the capital Mogadishu.
Last month, residents said several hundred Ethiopian troops crossed into Hiran and Galgudud in central Somalia, but Ethiopia, which invaded Somalia in 2006 with US backing, dismissed the reports as “absolutely not true”.
On Saturday, witness Abdirahman Isa said he saw Somali government troops accompanied by armed trucks belonging to Ethiopian forces entering Beledwyne.
“I have seen nearly 20 dead bodies strewn in the streets and outside the town, most of them are combatants but a few civilians were also caught in the crossfire,” he added.
“We have counted around 18 dead bodies, most of them the combatants, some of them have died outside the city and others are lying in the streets of Beledweyne,” Mohamed Moalim Osmail, an elder in the city, told AFP.
But a representative of Shebab denied it was defeated.
“The enemy tried to destroy the frontline barracks of the mujahideen fighters but they lost in the battle, we killed many of them and the mujahideen fighters have retreated back from some positions in order to reorganise their strategy”, Abu Musab told reporters in Mogadishu.
The Horn of Africa country has been ravaged by a nearly uninterrupted civil war since the 1991 ouster of president Mohamed Siad Barre sparked vicious bloodletting by rival militias fighting for power.
Ethiopia’s 2006 invasion of Somalia sparked a bloody uprising, and its troops pulled out three years later after failing to restore order in its lawless neighbour.
Shebab insurgents control much of southern Somalia, but are also battling both the Western-backedgovernment in Mogadishu and Kenyan troops in the far south, who crossed the border in October to attack rebel strongholds.
Kenyan troops clashed with Shebab militants on Thursday, leaving several dead, the latest casualties in weeks of dragging conflict in southern Somalia.
Earlier this month, a first contingent of 100 troops from Djibouti joined 9,800 Burundian and Ugandan AU soldiers who have been deployed since 2007 to protect the government from the Shebab in the war-shattered capital.