In a statement issued Thursday, the UN Mission in Ethiopia and Eritrea (UNMEE) said that its Indian battalion posted on the border heard an exchange of fire in the early hours of Wednesday.

"UNMEE expresses concern about this firing incident between Ethiopia and Eritrea and is calling on both parties to show maximum restraint," the statement said.

Some 200,000 troops are deployed along the border, fueling international fears of a new flare-up after the failure of a mediation between the two foes.

A border panel was dissolved a month ago with Ethiopia refusing to recognise a ruling that granted Eritrea a flashpoint border town.

The two Horn of Africa neighbours already fought a bitter war between 1998 and 2000 that left an estimated 70,000 dead.

Eritrea's information ministry accused Ethiopia of launching a small scale attack.

"In continuation to its ongoing provocations against the sovereignty and territorial integrity of Eritrea, the TPLF regime (Ethiopia) has unleashed a relatively small scale attack," a statement said.

It said the attack targeted Eritrean forces tasked with patroling the border area and claimed it "met with utter failure."

The Ethiopian government flatly denied Eritrea's accusations and said it had not carried out any hostile military operation along the border.

"This is simply an outrageous accusation by Eritrea. Ethiopia has declared that it is not going to start any war or organise any form of provocation," said Bereket Simon, spokesman for Prime Minister Meles Zenawi.

"The government in Asmara, it seems, is trying to hide the internal situation to the outside world by accusing us on the international stage," he added.

"There has been no attack from Ethiopia. The Ethiopian government is not interested in any provocative actions," Bereket added.

The Ethiopian ministry of foreign affairs confirmed that an incident took place but returned the accusation, blaming Eritrea.

"There was an incident, it is true. But the incident is of Eritrea's making which is being looked into. It is possible that it may have been a result of an accidental encounter between the reconnaissance missions of the two parties," the ministry said in a statement.

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