Baidoa is the seat of Somalia's parliament. Businesses in the centre halted as dozens of government soldiers, who are backed by the Ethiopian military, began searching pedestrians, vehicles and shops for weapons.
"Men armed with pistols shot dead two Ethiopian troops in the centre of town this morning," witness Abdulqadir Mohamed said. "The bodies lay in the street for nearly half an hour."
A Reuter’s reporter saw Ethiopian soldiers arrest five men.
Somalia's interim government and its Ethiopian allies are facing a persistent insurgency by remnants of a hardline Islamist group they routed from the city just over a year ago.
At least seven people, including four policemen, were killed in the capital Mogadishu on Monday in the heaviest fighting for weeks between government forces and suspected insurgents.
Hundreds of under-equipped African Union peacekeepers from Uganda and Burundi have been unable to quell the bloodshed.