.Ethiopia 's head of government information, Bereket Simon, told reporters the reports were being fabricated by Islamist rebels to try and muster popular support for their battle to topple the government of President Sheikh Sharif Ahmed.

" Ethiopia is defending its border. We have no intention of going back into Somalia . When we decide to enter Somalia we will tell the world that we have decided to enter based on our national interest," he said.

Ethiopian troops invaded Somalia in late 2006 to oust an Islamist movement from the capital in which Ahmed played a leading role. He fled into exile but joined a peace process last year and was elected in January.

Addis Ababa has said it supports the new government, but is wary of the hardline Islamists, who have links to al Qaeda, because they control large areas of Somalia and have threatened to destabilise Ethiopia and Kenya .

"We think the reason (for the reports) is that the extremists are losing ground and feel they can mobilise people by presenting Ethiopian interventions to the public," he said.

"That is why they are building these accusations as a scarecrow to get support."

RECONNAISSANCE MISSIONS

The Ethiopian troops were deeply unpopular during their two-year intervention and helped rally support for the insurgency as it became a nationalist campaign to oust the foreign invaders.

There were hopes Islamist President Ahmed would be able to reconcile the warring factions by building an inclusive government and introducing sharia law throughout the country.

But hardline Islamist group al Shabaab, which has ties to al Qaeda, and allies in Hizbul Islam, led by Ahmed's former ally Sheikh Hassan Dahir Aweys, have instead stepped up their fight.

They control most of southern Somalia , parts of the central region and a number of suburbs in the capital Mogadishu .

African Union troops are protecting the presidential palace, the airport and sea port in Mogadishu . But despite a government offensive last month, the rebels are still anchored in the capital and neither side seems able to deliver a knockout blow.

The on-off skirmishes in the capital have displaced 122,000 people since May 7 and killed hundreds. Since the start of 2007 more than 18,000 people have been killed and at least one million depend on food aid in a country prone to drought.

Residents, local media, some aid groups and Islamist insurgents have reported seeing Ethiopian troops on the Somali side of the border in the past few weeks and months.

Ethiopia initially denied making any incursions, but said earlier this month that military personnel had been carrying out "reconnaissance" missions into Somalia .

Residents in Galgadud region north of the capital said on Friday that heavily-armed Ethiopian troops arrived in Balanbale, a town controlled by pro-government forces.

"I know that Galgadud is the birthplace of Dahir Aweys. Let alone entering central Somalia , we are not in Somalia at all," Bereket said. (Editing by David Clarke).