Ethiopia declared openly on Thursday that it will support Eritrean rebel groups fighting to overthrow President Isaias Afewerki.
The two countries have often traded harsh rhetoric since a 1998-2000 border war killed some 80,000 people, but Ethiopian Prime Minister Meles Zenawi has until now ruled out confrontation.
However, Addis Ababa warned last month it would take "all measures necessary" against its northern neighbour after accusing it of plotting to carry out bomb attacks inside Ethiopia during an African Union summit in February.
Government officials have said the plot targeted a hotel where a number of heads of state were staying during the summit, as well as other facilities.
Ethiopian Foreign Affairs Minister Hailemariam Desalegn accused Asmara of working to destabilise his country and topple the government in Addis Ababa.
"We have embarked ourselves on equal reaction, which is regime change (in Eritrea)," he told journalists.
"This regime change is not by invading Eritrea but by supporting the Eritrean people and groups which want to dismantle the regime. We are fully engaged in doing so," Hailemariam said.
Hailemariam did not disclose the extent of Addis Ababa's support, but a few Eritrean groups already operate from northern Ethiopia and have staged sporadic hit-and-run attacks inside Eritrea in the past.
On Wednesday, some 1,600 Eritrean refugees gathered in Addis Ababa to call for democratic rule in their country, which thousands have fled in recent years citing rights abuses.
Authorities in Asmara were not immediately available for comment, but Isaias often dismisses foreign-based opponents as "puppets" acting under the orders of foreign governments.
Eritrea was part of Ethiopia until 1991 when rebel forces led by Isaias fought their way to secession following a 30-year liberation war.
Meles and Isaias were then allies leading separate rebel groups fighting former Ethiopian dictator Mengistu Haile Mariam, but they have been foes ever since the border war.
Eritrea has since become one of the world's most secretive nations and has frosty relations with most of the West including the United States, which it accused of siding with Ethiopia during its border war.
The border conflict has yet to be resolved, with Ethiopia calling for a negotiated implementation of a boundary ruling, an approach Eritrea has ruled out.