By Aweys Yusuf and Abdi Sheikh

MOGADISHU (Reuters) - Five people including two government soldiers and an insurgent have been killed in clashes between allied Ethiopian-Somali troops and suspected Islamist insurgents in Mogadishu, witnesses said on Saturday.

Local residents said the gunfight began when Ethiopian and Somali forces patrolling near Mogadishu's sprawling Bakara market were ambushed by Islamist insurgents armed with machine guns and rocket-propelled grenades.

"I saw the dead bodies of a man and a woman who were killed by stray bullets inside Bakara. The fighting is still going on and we are stranded in the market," shopkeeper Mohamed Osman told Reuters.

Osman said artillery shells were hitting neighbourhoods near the market the government believes are a hotbed of insurgent activities.

Another shopkeeper, Abdiweli Daud, said he could see one dead insurgent lying in front of a building where he had taken cover while the fighting went on.

Two government soldiers were shot dead at Hawlwadag junction near Bakara early on Saturday.

"Men with pistols shot dead two government soldiers at Hawlwadag. We had to run away for our lives because other troops arrived and began shooting indiscriminately," witness Abdi Ahmed told Reuters.

Government officials were not immediately available for comment. The Islamist insurgents face the forces of Somalia's interim government and its Ethiopian military backers.

The Horn of African country has been anarchic since warlords toppled dictator Mohamed Siad Barre in 1991 but the violence has worsened since Somali and Ethiopian troops ousted the Islamists from Mogadishu just over a year ago.