A statement issued in the Eritrean capital, Asmara, denied that Eritrean troops had invaded, and said instead that Ethiopian troops had made an incursion into Eritrea.

Journalist Alex Last in Eritrea discusses the dispute with the BBC World Service's Newshour (2'36")

It said the incursion happened earlier this month in the Babme area in south-western Eritrea.

The Eritrean Foreign Minister, Haile Weldensae, appealed for a third party to step in to mediate in the dispute - although he did not elaborate.

The statement comes a day after the Ethiopian government accused Eritrea of occupying a border area after its troops clashed with Ethiopian security forces.

In an emergency session of parliament on Wednesday, Ethiopia called for the immediate withdrawal of the troops and threatened unspecified action unless the demand were met.

A troubled relationship

The border area at the centre of the dispute has been the scene of previous clashes between Eritrean troops and the Ethiopian police and people's militia who provide security on the Ethiopian side.

In some places, the border line is still in dispute.

The Horn of Africa neighbours have enjoyed close political and economic ties since Eritrea won independence from Ethiopia after a referendum in 1993, but a currency dispute soured relations last year.

Until November 1997, Eritrea used Ethiopia's birr currency. But it then introduced its own nakfa unit, saying this would establish its economic independence.

Ethiopia responded by saying that all business transactions with Eritrea would be conducted in dollars and other hard currencies. Cross-border trade was damaged.

Communications affected

In Asmara there was a surge of food-buying on Wednesday on rumours that commercial traffic with Ethiopia might be halted. Eritrea's port of Massawa is a vital transit point for Ethiopian exports.

Commercial flights between Addis Ababa and Asmara have been cancelled until further notice, although Ethiopian Airlines said this was for technical reasons.

Eritrea fought a gruelling 30-year war for liberation and played a key role in the alliance that ousted Ethiopia's Marxist leader Mengistu Haile Mariam in May 1991.

Ethiopian rebels of the Ethiopian People's Revolutionary Democratic Front (EPRDF) then took power and assented to demands by their Eritrean allies for independence.