Islamic fighters, many of them Arabs and South Asians, were fleeing in heavily armed trucks toward the Kenyan border, 100 miles to the south after a 13-day onslaught led by Ethiopian army.
"I can confirm to you that our forces have captured Kismayo," Somalia's Prime Minister Ali Mohamed Gedi told The Associated Press.
Somalia's interim government vowed to hunt down those who have fled. The Islamic forces say they will launch an Iraq-style guerrilla war if defeated.
Among those sought were three al-Qaida suspects wanted in the 1998 bombings of U.S. embassies who were being sheltered by the Islamic group. The government hoped to catch them before they slipped out of the country.
Government and Ethiopian forces were delaying their entry into the coastal seaport of Kismayo, which Islamic fighters captured in September, because of land mines.
Hundreds of gunmen, who apparently deserted from the Islamic movement, began looting the warehouses where the Council of Islamic Courts had stored supplies, including weapons and ammunition. Gangs skirmished in the streets and the city descended into chaos, businessman Sheik Musa Salad said.
"Everything is out of control, everyone has a gun and gangs are looting everything now that the Islamists have left," he added.
The Islamic forces have a base near the border on a small peninsula called Ras Kamboni, where there is a pier and traditional oceangoing boats known as dhows.
Ethiopian MiG fighter jets flew low over the ocean looking for boats that might be carrying the escaping Islamic fighters.
Kenyan president Mwai Kibaki, in his New Year's message, called for an urgent summit of the east African regional body IGAD to discus the Somali crisis.
The Islamic forces began to disintegrate after a night of artillery attacks at the front line and following a mutiny within its ranks, witnesses said.
On Sunday in Kismayo, Somalia's third-largest city, an estimated 3,000 Islamic fighters were preparing for a bloody showdown, but Islamic fighter Rabi Ahmed told The Associated Press that about 50 militiamen in the city were refusing to go to the front and fight.
Islamic leaders had vowed to make a stand against Ethiopia, which has one of the largest armies in Africa, or to begin an Iraq-style guerrilla war.
"Even if we are defeated we will start an insurgency," said Sheik Ahmed Mohamed Islan, the head of the Islamic movement in the Kismayo region. "We will kill every Somali that supports the government and Ethiopians."
Gedi said three al-Qaida suspects wanted in the 1998 bombings of U.S. embassies in east Africa that killed more than 250 people were hiding in Kismayo.
Somalia's interim government and its Ethiopian allies have long accused Islamic militias of harboring al-Qaida, and the U.S. government has said the 1998 bombers have become leaders in the Islamic movement in Africa.
"If we capture them alive we will hand them over to the United States," Gedi told the AP. "We know they are in Kismayo."
Gedi said he spoke Sunday to the U.S. ambassador in Kenya, Michael Ranneberger, about sealing the Kenyan border with Somalia to prevent the three terror suspects from escaping.
The U.S. government has a counterterrorism task force based in neighboring Djibouti and has been training Kenyan and Ethiopian forces to protect their borders. The U.S. Navy's Fifth Fleet also has a maritime task force patrolling international waters off the Somali coast, which helps prevent terrorists from launching attacks or transporting personnel, weapons or other material, said fleet spokesman Commander Kevin Aandahl.
Islamic movement leaders deny having any links to Osama bin Laden's al-Qaida terror network.
But in a recorded message posted on the Internet Saturday, deputy al-Qaida leader Ayman al-Zawahri called on Somalia's Muslims and other Muslims worldwide to continue the fight against "infidels and crusaders."
Gedi accused al-Zawahri of trying to destabilize Somalia and its neighbors.
In the past 10 days, the Islamic group has been forced from the capital, Mogadishu, and other key towns in the face of attacks led by Ethiopia.
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