A Russian television correspondent at the scene, RTR's Andrei Medvedev, said the fighting involved separatist forces defending the outskirts of the South Ossetian capital Tskhinvali and unidentified individuals deployed in the ethnic Georgian village of Tamarasheni, a few hundreds meters further north.
Two South Ossetian soldiers were reported wounded in the incident. At least three people were wounded on the Georgian side. Whether they are local residents or Georgian peacekeepers remains unclear.
Georgian President Mikheil Saakashvili shortened a state visit to Israel on news of the incident. Upon his return to Tbilisi, he convened an emergency session of the National Security Council to discuss developments.
Both sides are blaming each other for the overnight shoot-out.
Mikheil Kareli, the governor of Georgia's Shida Kartli region that officially includes areas of South Ossetia, described the overnight incident as a "provocation" staged by separatist forces.
"It is a new provocation on the part of the leadership of the Tskhinvali region," Kareli said. "The Tskhinvali region's armed forces opened fire on Georgian peacekeepers and Tamarasheni villagers."
Tskhinvali in turn claims its forces only returned fire after coming under Georgian attack.
South Ossetian leader Eduard Kokoity, who has been holding consultations in Moscow for the past few days, told Russia's Interfax news agency before returning to Tskhinvali that the shoot-out was the continuation of Saakashvili's "aggressive" plans.
The Georgian leader, who succeeded president Eduard Shevardnadze last January, has vowed to restore control over South Ossetia and the other separatist republic of Abkhazia as soon as possible.
On 28 July, Saakashvili once again addressed the Abkhaz issue in an impassioned speech delivered before representatives of Israel's Georgian community:
"As long as there remains one part of Georgian territory that is not considered Georgian, where Georgian citizens are not let in freely and where their passports are being checked, I will consider that my life has no meaning," Saakashvili said. "My main objective in life is to get Abkhazia back and restore Georgia's territorial integrity."
Abkhazia and South Ossetia proclaimed their independence in the early 1990s, triggering short but bloody armed conflicts with Georgia.
Saakashvili has pledged to restore control over the two provinces only through negotiations. Yet, his recent decision to dispatch Interior Ministry troops to South Ossetia -- officially to protect ethnic Georgians living there and combat smuggling from Russia's Republic of North Ossetia -- has sparked concern in both Tskhinvali and the Abkhaz capital Sukhumi.
Various incidents involving small gunfire, the hijacking of Georgian troops and ammunition convoys have been reported in recent weeks.
Russia, which has been maintaining peacekeepers in both breakaway republics, on 29 July called on Georgia and South Ossetia to avert further violence.
"Moscow hopes restraint and common sense will prevail," a Foreign Ministry statement said, adding: "It is imperative that the sides sit down at the negotiating table and try to settle their problems only through peaceful means."
Russia also called upon Georgia to abide by earlier agreements to withdraw its Interior Ministry troops from South Ossetia.
Meanwhile, the commander of the Russian peacekeeping forces in the area, General Svyatoslav Nabzdorov, said patrols would be reinforced around Tamaresheni to avoid further incidents.
(RFE/RL/Georgian TV/Russian TV/Georgian and Russian news agencies)