Eritrea has accused Ethiopia of launching an attack at the countries' heavily-militarised border.
Ethiopia has not commented on the reported fighting in the Tsorona area, about half-way along the frontier.
Residents on the Ethiopian side of the border reported hearing gunfire and seeing a large movement of troops and artillery towards the border.
A peace deal in 2000 ended the countries' two-year war but it has not been fully implemented.
Ever since, the countries have been in a state of "neither war nor peace", says the BBC's Ethiopia correspondent Emmanuel Igunza.
Eritrea says the tense relations with Ethiopia are why it has national conscription, which can last for decades.
It's not clear why the fighting has erupted now as neither country has issued any reasons.
But in recent months both sides have upped the rhetoric with the latest verbal salvo coming from Eritrea's President Isaias Afwerki during celebrations to mark 25 years of the country's independence.
He accused Ethiopia of being hostile to Eritrea's sovereignty.
Earlier this year, Ethiopia's Prime Minister Hailemariam Desalegn said his country was ready to take "proportionate military action against Eritrea" for what he described as "continuous acts of provocation and destabilisation of Ethiopia".
