The African Union urged Djibouti and Eritrea to remain calm and exercise restraint on Saturday after Djibouti accused its neighbour of occupying disputed territory along their border following the withdrawal of Qatari peacekeepers.
On Friday, Djibouti's Foreign Minister Mahamoud Ali Youssouf said Eritrean troops had seized Dumeira Mountain and Dumeira Island, areas the neighbours contest, and his country's military was on alert.
"Djibouti is a peaceful country and we have prioritised diplomatic solutions, but if Eritrea insists in seeking military solutions, Djibouti is ready for that," Youssouf said in a press conference broadcast on local television.
Authorities in the Eritrean capital Asmara are yet to respond to the allegations.
Qatari peacekeepers were previously deployed along the frontier. Doha announced on June 14 that it had pulled its contingent out, days after the two East African countries sided with Saudi Arabia and its allies in their standoff with Qatar.
In a statement, the African Union Commission's chairman Moussa Faki Mahamat appealed for calm.
"The AU Commission, in close consultations with the authorities in Djibouti and Eritrea, is in the process of deploying a fact-finding mission to the Djibouti-Eritrea border," he said.
The United Nations Security Council is due to discuss the situation behind closed doors on Monday, according to diplomats.
Clashes broke out between the Horn of Africa countries in June 2008 after Djibouti accused Asmara of moving troops across the border, raising fears the spat could engulf the region.
The dispute triggered several days of fighting in which a dozen Djiboutian troops died and dozens were wounded. Eritrea had initially denied making any incursions, accusing Djibouti of launching unprovoked attacks.
At the time, the UN Security Council requested both sides withdraw, before the neighbours accepted a Qatari request to mediate and deploy peacekeepers.
Qatar has not given reasons for its withdrawal, but it comes amid a diplomatic crisis with some of its Arab neighbours. They cut ties a week ago, accusing Qatar of backing Islamist militants and Iran - claims Doha strongly denies.
Djibouti is a strategic ally of world powers, hosting French and US military bases with a Chinese one under construction, while Eritrea is widely regarded as a pariah state.
Djibouti's large port is also a conduit for imports to and exports from Ethiopia, Eritrea's bitter enemy.
-Additional reporting by AFP