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 Emmanuel Igunza in Nairobi.
Eritrea says the tense relations with Ethiopia are why it has national conscription, which can last for decades.
The conflict, over the exact location of the border led to the deaths of an estimated 80,000 people.
Ethiopia "unleashed an attack against Eritrea on the Tsorona Central Front. The purpose and ramifications of this attack are not clear," the Eritrean governmentsaid in a short statement issued on Sunday night.
It does not mention any casualties.
Timeline - A history of tension
- 1991 - Eritrea gains independence from Ethiopia after long civil war
- 1998-2000 - border war leaves an estimated 80,000 dead
- 2002 - boundary commission draws border and puts hotly-disputed Badme in Eritrea
- 2004 - Ethiopia accepts border ruling "in principle" but calls for dialogue with Eritrea
- 2006 - boundary commission gives the countries a year to implement ruling
- 2008 - UN ends peacekeeping mission without border demarcated
- 2012 - Ethiopia attacks positions inside Eritrea targeting "subversive groups"
Ethiopia's Information Minister Getachew Reda, who is out of the country, told the BBC he was not aware of the fighting.
As part of the Algiers peace agreement signed in 2000 both countries agreed to accept the ruling of an independent boundary commission over the location of the frontier as "final and binding".
But after the commission ruled that the disputed town of Badme, where the conflict began, was in Eritrea, Ethiopia at first refused to agree to the border demarcation and then called for dialogue before it would implement the decision.
This has rejected by Eritrea and there has been an impasse ever since, although clashes have been rare.
BBC
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