Fighting erupted on Saturday morning in Oromia's Gimbi district between pro-government forces and the Oromo Liberation Army (OLA), a rebel group which is branded a terrorist organisation by the Ethiopian government.
Together, Amharas and Oromos make up the vast majority of Ethiopia's 115 million people and Prime Minister Abiy Ahmed's government has previously accused the OLA of ethnic massacres.
Eyewitnesses, who spoke to AFP on condition of anonymity for safety reasons, said the attack lasted several hours, with unclaimed bodies still lying on the streets.
"I lost my 16-year-old daughter in the attack shot by a bullet from the (OLA) gunmen," one Amhara man said, adding that the rebels had blocked the main highway.
Another man told AFP he had "personally helped bury 61 bodies on Sunday, with the total number of buried bodies on Sunday being 351 in total."
"The intention of all these attacks is to force us to leave," he said, adding that "our houses and properties have been destroyed."
"I want to leave this area, go to my ancestral region... that at least would allow me to live in peace," he said.
The Oromia regional authorities said in a statement that the OLA had "committed a cruel attack on innocents" and vowed to take strong measures against the insurgents.
But OLA spokesman Odaa Tarbii blamed the region's own pro-government militia for the killings and called for an independent investigation into the matter.
"The Abiy regime is again blaming the OLA for atrocities committed by its own retreating fighters," he said on Twitter.