UN chief Kofi Annan called on Asmara to immediately withdraw from the so-called Temporary Security Zone (TSZ) created by the 2000 peace deal that ended the arch-rival Horn of Africa neighbors' bloody two-year border war.
He said the movement, reported earlier Monday by the UN peacekeeping mission that monitors the border, could "seriously jeopardize" and "undermine" the agreement with "potential consequences for the wider region."
"This development constitutes a major breach of the ceasefire and the integrity of the TSZ," Annan spokesman Stephane Dujarric said, adding that Eritrean forces had also taken over a UN border outpost.
"It could seriously jeopardize the peace process and undermine the Algiers Agreements between Ethiopia and Eritrea, with potential consequences for the wider region," he said in a statement.
Mr Annan "is deeply concerned about the incursion" and "urges the government of Eritrea to withdraw its troops from the zone immediately and to cooperate with the United Nations in restoring the ceasefire arrangements," he said.
Some 80,000 people lost their lives in the 1998-2000 war between Ethiopia and its much-smaller neighbor to the north, which was created only in 1993 after a long independence struggle.
Neither officials in Eritrea nor Ethiopia were immediately available to comment on the development, which came amid heightened tensions between the two nations as well as between the United Nations and Asmara.
Eritrea has long complained that Ethiopia is violating the 2000 agreement by refusing to accept a new border delineation set out in 2002 by an international panel under the terms of the cessation of hostilities agreement.
Asmara accuses the world body, and in particular, the United States, of failing to put enough pressure on Addis Ababa to accept the demarcation, which awarded the flashpoint town of Badme to Eritrea.
Ethiopia has said it is willing to accept the decision in principle but has called for revisions, claiming it will unfairly separate families and communities between the two countries, a stance Eritrea rejects outright.
To show its displeasure, Asmara last year slapped restrictions on patrols by the UN Mission in Ethiopia and Eritrea (UNMEE) in its territory along the 1,000-kilometer (620-mile) border.
Eritrea also expelled all European and North American UNMEE staff.
It has steadfastly refused to rescind the restrictions despite UN Security Council threats of sanctions and repeatedly warned that a new war is possible if Ethiopia continues to object to the implementation of the new border.
Earlier this year, US-sponsored mediation talks between the two countries and the boundary panel failed to resolve the matter with Asmara complaining that Washington wanted to redraw the commission's binding decision.
The two countries are also suspected by many observers of using Somalia -- where a powerful Islamist movement is challenging a weak UN-backed transitional government -- as a proxy battlefield.
Ethiopia supports the government although it has denied numerous eyewitness reports of having deployed troops to protect it from feared attacks by the Islamists, who are believed to be receiving military support from Eritrea.
At the same time, relations between Eritrea and the United Nations deteriorated with the arrest of a UN staffer for alleged human trafficking in August and expulsion of five UN employees accused of espionage in September.
Last month, the UN Security Council extended by four months UNMEE's mandate but also agreed to consider downgrading the 3,790-strong force if the stalemate over the border demarcation continues.
Council members said if no progress had been made by January 31, they would "transform or reconfigure" the UN mission "as the council may decide."
At the time, Annan called the situation "untenable" and added that "if allowed to fester, could lead intentionally or unintentionally to events with disastrous consequences for the two countries and the whole region."