Azerbaijan has threatened a "major attack" on the capital of the disputed Nagorno-Karabakh region, amid clashes with ethnic Armenian separatists, BBC reported.
Defence Minister Zakir Hasanov said troops had been instructed to target Stepanakert if the separatists did "not stop shelling our settlements".
Nagorno-Karabakh warned that it would be met with a "very painful" response.
Armenia, which backs the separatists, earlier warned that the fighting could spark a large-scale war in the region.
President Serzh Sargysan said a renewed conflict would "affect security and stability not only in the South Caucasus, but Europe as well".
US Secretary of State John Kerry and his Russian counterpart, Sergei Lavrov, also expressed serious concern and called on both sides to stop fighting.
Mr Hasanov warned that Azeri forces would begin an artillery barrage on Stepanakert, which is home to about 50,000 people, if Armenian forces did not shelling populated areas.
"Despite repeated warnings from the defence ministry, Armenia leaves no other way to Azerbaijan but take appropriate retaliatory measures in response to its inhuman steps," a statement on the Azeri defence ministry's website said.
In response to the threat, the defence ministry of the unrecognised Nagorno-Karabakh republic promised a crushing response.
The Azeri defence ministry said Armenian forces had continued to shell military positions and villages near the frontline despite the ceasefire declared unilaterally by Azerbaijan on Sunday.
Up to 170 Armenian troops had "neutralised" and 12 Armenian armoured vehicles destroyed, it added.
However, an Armenian defence ministry spokesman dismissed the claim as a product of the Azeri military's "wild imagination", according to the Associated Press.
The Armenian defence ministry reported that an Azeri drone had attacked a bus carrying Armenian "volunteers" to Martakert district, killing five people.
Hundreds of people from across Armenia have reportedly signed up in recent days to join the conflict.
A Nagorno-Karabakh military spokesman meanwhile said 20 Armenian troops had been killed since the fighting escalated on Saturday, while 26 others were missing, the Mediamax news agency reported.
None of the claims could be independently verified.
Fighting between the two sides began in the late 1980s and escalated into full-scale war in 1991 as the Soviet Union collapsed, killing about 30,000 people before a ceasefire in 1994.
Nagorno-Karabakh, which lies inside Azerbaijan but is controlled by ethnic Armenians, has since run its own affairs with Armenian military and financial backing, but clashes break out on a regular basis.
Frozen conflict over Nagorno-Karabakh
- The conflict has roots dating back over a century to competition between Christian Armenian and Muslim Turkic and Persian influences
- Frictions exploded into violence when the region's parliament voted to join Armenia in the late 1980s
- The ethnic Azeri population - about 25% of the total before the war - fled Karabakh and Armenia while ethnic Armenians fled the rest of Azerbaijan
- Russian-brokered ceasefire signed in 1994, leaving Karabakh and swathes of Azeri territory around the enclave in Armenian hands
- The UN has expressed support for Azerbaijan's territorial integrity and demanded Armenian forces withdraw
- Progress on a peace process stalled after talks between Armenian and Azeri leaders in 2009. Serious ceasefire violations have followed
- Karabakh is an Azeri word meaning "black garden", while "Nagorno" is a Russian word meaning "mountain"
