A 13-year-old boy was shot dead and two other people were injured as violence raged for several hours in Somalia's third biggest city, witnesses said.
"We have been taken over by extremists, the Islamic courts have taken us by force, and now they are firing at us," said protester Dahabo Dirie.
Hundreds of Ethiopian soldiers moved to the temporary seat of Somali government in Baidoa, amid fears of attack by the powerful Islamists, witnesses said.
But the government and Ethiopia denied witness accounts that 300 to 400 uniformed Ethiopian troops were in the town, about 250 kms northwest of Mogadishu, but Islamists denounced their alleged presence.
In the Kenyan capital, Somali prime minister Ali Mohamed Gedi said the seizure of Kismayo from a government-allied militia broke agreements between the two sides brokered by the Arab League in Khartoum.
"The attack on Kismayo at the weekend was unprovoked and contrary to peace deals reached in Sudan," he told reporters in Nairobi. "The Islamic courts' main priority is to use violence."
He accused the movement of fomenting unrest, associating with terrorists and denying human rights by imposing strict Sharia law in areas they control.
"The courts are associated with international terrorist groups like
al-Qaeda," Prime Minister Gedi said. “They can't teach us Islam, Somalis are Sunnis, they are preaching terror."
Having moved into Kismayo peacefully, Islamist gunmen opened fire to disperse a crowd protesting the removal of the Somali flag from the headquarters of a local militia that had held the town until Sunday.
Witnesses said at least two people had been killed and three wounded but Islamist commanders denied there were any casualties, although they acknowledged firing over unruly demonstrators in the town.
Hundreds of turbaned, heavily armed fighters manned positions in and around Kismayo, about 500 kms south of Mogadishu, and vowed to impose Sharia law, they said.
The move gave the Islamists, who already control the capital and much of southern Somalia, a strategic position from which they say they will block the deployment of foreign peacekeepers proposed to aid the government.
"We got information that the port was supposed to be used by foreign troops led by Ethiopa and that is why we have taken it," said Sheikh Sharif Sheikh Ahmed, executive director of the Supreme Islamic Council of Somalia (SICS).
Ethiopia has pledged to defend the government from any threat by the Islamists who took control of Mogadishu in June.
Both Addis Ababa and the Baidoa government denied witness accounts that Ethiopian troops had moved in.
"There are no Ethiopian troops in Somalia," Ethiopian foreign ministry spokesman Solomon Abebe told AFP.
Somali government spokesman Abduraman Dinari categorically rejected the reports and said they were being fabricated by the Islamists to distract attention from their overnight seizure of Kismayo.
The fall of Kismayo is a severe blow to the government and its hopes for the deployment of a nearly 8,000-strong regional east African peacekeeping force.
Despite fierce Islamist opposition, the seven-member Inter-Govermental Authority on Development (IGAD) has approved African Union-endorsed plans to send troops to salvage the government it helped create in 2004.