Ethiopian and Somali government forces are advancing towards Somalia's capital Mogadishu, which is currently held by the Union of Islamic Courts (UIC).
The transitional government says it is forcing the militia to retreat
Earlier, they seized the strategic town of Jowhar, 90km from the capital, from Islamist militias during a dawn attack.
At the weekend Ethiopia began a major offensive against the UIC, which held much of central and southern Somalia.
Jowhar is a former UIC stronghold, and its loss leaves the Islamists with control of little more than the coast.
The Ethiopian and pro-government Somali troops are reported to be only 30km from Mogadishu.
In Jowhar, residents told the BBC they had seen government forces riding on top of Ethiopian armoured vehicles.
The UIC still holds Mogadishu, and the southern port city of Kismayo.
Leaders of the militia have admitted pulling out of many towns. Reports suggest that the Islamists evacuated many towns without putting up a fight.
The UIC's two most senior military commanders - the defence chief, Yusuf Indade, and his deputy, Abu Mansur - are currently both on the Hajj pilgrimage in Mecca.
On Tuesday Ethiopia said it had repelled the militia from the seat of Somalia's transitional government in Baidoa, but the UIC said the pull-out was tactical and the group was "getting ready for a long war".
Hundreds of people have been fleeing Jowhar, the Associated Press news agency reported.
"We do not know where to escape, we are already suffering from floods, hunger and disease," resident Abdale Haji Ali told AP. "We are awaiting death."
Both sides claim to have inflicted hundreds of casualties. The Red Cross has reported more than 850 injured people at hospitals it supports.
The UN's World Food Programme has suspended air drops into southern Somalia because of the fighting, but the Red Cross says it has been able to continue its cargo flights to its partners in Somalia.
Agencies are having difficulty reaching people affected by months of drought, which has now been followed by flooding
The UN High Commissioner for Refugees says it is concerned that many people may be fleeing the fighting, and is preparing to receive them in camps along the Kenyan border.
The Security Council, which has been debating the Somalia conflict, is due to resume discussions later on Wednesday.
Splits have emerged on the council with Qatar insisting that any statement should call for the immediate withdrawal of all foreign forces, including Ethiopia's, from Somalia.
Other council members say that this should not apply to Ethiopian troops, arguing that they are in Somalia at the request of the interim government.
On Tuesday, UN envoy Francois Lonseny Fall warned the Security Council that failure to reach a political settlement could lead to a conflict that could "have serious consequences for the entire region".
The UIC - who seized control of the capital six months ago - have introduced law and order to the capital and much of southern Somalia for the first time in 16 years.
But other countries accuse the UIC of links to al-Qaeda, charges it denies.
Somalia and Ethiopia - a mainly Christian nation - have a history of troubled relations, and Islamists have long called for a holy war against Ethiopian troops in Baidoa.
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