Eritrea triggered the border war with Ethiopia when it attacked its neighbour in May 1998, an international commission in the Hague has ruled.
There have been recent reports of troop movements on both sides
Since there was no armed attack against Eritrea, its attack on Ethiopia could not be justified as lawful self-defence under the United Nations charter.
Eritrea is now liable to compensate Ethiopia for damages caused, it said.
Tensions over the border have risen in recent months with both countries sending more troops there.
Last week, Western UN staff in Eritrea left at the request of Eritrea.
Most of the UN peacekeepers deployed to monitor the border under a peace accord that ended the war in 2000 are from Asian and African countries and have stayed behind.
The Claims Commission - that was set up as part of the peace agreement - said that settling such disputes by use of force could not be considered self-defence.
Dec 2000: Peace agreement
Apr 2002: Border ruling
Mar 2003: Ethiopian complaint over Badme rejected
Sep 2003: Ethiopia asks for new ruling
Feb 2005: UN concern at military build-up
Oct 2005: Eritrea restricts peacekeepers' activities
Nov 2005: UN sanctions threat if no compliance with 2000 deal
"[Eritrea] is liable to compensate Ethiopia for the damages caused by the violation of international law," the ruling, published on its website, said.
Ethiopia has welcomed the ruling.
The war was ostensibly fought over the dusty town of Badme, which was awarded to Eritrea by another commission set up as part of the peace agreement.
But Ethiopia has not yet withdrawn its forces from Badme, frustrating Eritrea.
Under the peace accord, the two states agreed to accept the findings of the border commission.
In recent months, Eritrea has placed increasingly tight restrictions on the operations of the UN peacekeeping force deployed along the border and ordered Western UN staff to withdraw.
Last week, the UN Security Council strongly condemned what they called Eritrea's unacceptable actions and restrictions on the peacekeeping mission and warned it could have implications for the operation's future.
It also emphasised the need for progress in implementing the Boundary Commission's decision over Badme.
The Horn of Africa neighbours' two-year conflict led to some 80,000 deaths.