At least four Somali policemen have been killed in the heaviest fighting in Mogadishu for several weeks.
Government forces and their Ethiopian allies have now sealed off the city’s main Bakara market where fighting began on Monday, traders have told the BBC.
Many of those who remain in Mogadishu earn their living in Bakara but the government says it is a stronghold of the Islamist insurgents.
Last week, the UN warned that Somalia was the world’s “forgotten crisis”.
Bakara businessman Muhidin Nur said he feared renewed violence:
“The allied troops sealed off the entire area and blocked all roads leading in,” he said.
Police spokesman Abdulahi Shasha said the troops were looking for illegal weapons in the market.
Local resident Sheikh Yusuf said the insurgents had seized one government armoured vehicle and destroyed another in Monday’s fighting.
“I saw the bodies of six people including four soldiers, the bodies of the soldiers were lying near an army vehicle which had been burnt and the civilians were caught in the crossfire,” said another local resident Asha Yusuf.
Some 60% of Mogadishu residents have fled the city, the UN says.
Last week, Christian Balslev-Olesen from the UN children’s agency warned that the lives of up to 15,000 Somali children were at risk unless emergency aid arrived in the next two weeks.
Without extra funding, emergency feeding programmes could be closed down next month, he warned.
“If you take all the indicators for children, it’s the most difficult place on the globe.”
Ethiopian troops intervened in Somalia just over a year ago, when they helped government forces oust Islamists from much of southern Somalia.
Since then the capital, Mogadishu, has been the scene of battles with government and Ethiopian troops taking on insurgents.
So far only 2,400 African Union peacekeepers have been sent to Somalia, of a planned 8,000-strong force.
Somalia has not had a functioning national government since 1991.