Ethiopian-backed Somali government troops and rival Islamists shelled each other with heavy artillery for a third day on Thursday, as the religious movement said it was now at war with Addis Ababa. Persistent rocket, mortar and machinegun battles since Tuesday have boosted fears that a devastating Horn of Africa war, sucking in regional players and spawning suicide bombings across east Africa, may have arrived. Both sides claimed to have killed hundreds, but there was no immediate confirmation of casualties. "We are at war with Ethiopia, but not with the (Somali) government," hardline Islamist leader Sheikh Hassan Dahir Aweys told Reuters by telephone. Aweys's comments came hours after he called the fighting around the government's encircled stronghold, Baidoa, "a small incident" and a top European Union envoy said the two sides had agreed to stop fighting and resume peace talks. The fighting started late on Tuesday, the deadline the Somalia Islamic Courts Council (SICC) had given Ethiopian troops protecting the government to leave the country or face war. The latest round of clashes began early on Thursday near Dinsoor, 100 km (62 miles) southwest of Baidoa. Residents and a Somali government source said troops loyal to both sides also appeared to be moving north in what some feared could spell fresh fighting in the town of Galkaayo. WAR OR SKIRMISHES? Thursday's shelling seemed to scuttle the shuttle diplomacy by European Union aid chief Louis Michel, who flew into Baidoa and Mogadishu, where he met Aweys, to push the two sides back to the bargaining table. Aweys, who denies U.S. and U.N. allegations he is linked to al Qaeda, blamed Ethiopia for starting the fight: "If we are attacked we are not going to sit back." The Somali government had no immediate comment. Ethiopia remained officially silent on a declaration of war and again denied its combat troops were in Somalia, but has promised "to inform the world" if it decides to attack the SICC. "These are baseless allegations which Aweys has been saying all along to mislead international public opinion," Ethiopian Information Ministry spokesman Zemedhun Tekele said.