The talks, which were due to be held in the Sudanese capital of Khartoum, were intended to reconcile Somalia's Transitional Federal Government (TFG) with the Union of Islamic Courts (UIC).
Sources said the main bone of contention was the UIC's demand that Ethiopian troops allegedly deployed in Somalia should withdraw.
"It was commonly established and agreed that there is a need for further consultation on both substantive and procedural issues to move the dialogue forward," the mediation team comprising the African Union, League of Arab States, European Union, Organisation of the Islamic Conference, United Nations and the east African regional Inter-Governmental Authority on Development (IGAD), said in a combined statement.
Amid widespread fears that lack of dialogue could lead to an escalation of violence between the two sides, the mediators urged them to exercise restraint.
"The Somali parties are urged to exercise full restraint and to commit themselves to their previous agreements reached in Khartoum," they said, in reference to earlier agreements in which both parties undertook not to pursue military solutions to the conflict.
The UIC delegation insisted that Ethiopian troops leave Somali territory before it sits down to talks with TFG representatives. The UIC claims the troops have been deployed inside Somalia to support the TFG. The TFG, meanwhile, has denied the presence of Ethiopian troops, claiming that the only Ethiopians in the country are military instructors.
"Ethiopia has declared war and invaded Somalia," Ibrahim Hassan Adow, head of UIC's foreign affairs department, who led the group's delegation to the talks in Khartoum, told IRIN on Thursday. "It's an invasion as we all know, and the world is not focusing on that issue."
Both parties to the conflict were also at odds over the composition of the mediation team.
The Arab League was to co-chair the talks with Kenya, the current chair of IGAD, but the TFG expressed reservations over the League's neutrality. The UIC has objected to Kenya's mediation, saying the country is biased in favour of the TFG, and that Kenya is one of the states favouring the deployment of foreign troops to Somalia - an idea strongly opposed by the Islamic Courts.
The UIC took control of the capital, Mogadishu, in early June and has continued to extend its authority over much of southern and central Somalia, challenging the legitimacy of the TFG, which was set up in 2004 in a bid to restore law and order after 15 years without a national government.
The TFG has also claimed that Eritrea - a bitter foe of Ethiopia since the 1998-2000 border war between the two countries - had sent armed forces to Somalia to back the UIC. Observers fear fighting could ignite a proxy war between Ethiopia and Eritrea on Somali soil.
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This article was produced by IRIN News while it was part of the United Nations Office for the Coordination of Humanitarian Affairs. Please send queries on copyright or liability to the UN. For more information: https://shop.un.org/rights-permissions