"Two shells landed about seven miles south west of the town," the paper said.
Myawaddy is on Myanmar's border with Thailand where many ethnic Karen live. The KNU is the oldest of several Myanmar rebel groups, and has been battling the government for six decades.
Myanmar has suffered decades of armed rebellion along its borders, and no government has controlled all of the nation's territory.
The military has ruled Myanmar since 1962, justifying its grip on power by claiming the need to fend off the rebels.
The latest KNU fighting was reported as UN Human Rights expert Tomas Ojea Quintana arrived Saturday in Myanmar for a six-day visit to assess the development of human rights following his visit last summer.
Quintana left for Karen State by helicopter early Sunday to meet with members of the Democratic Karen Buddhist Army (DKBA), a group of former Karen insurgents who switched sides in the early 1990s to fight the KNU.
His visit comes amid criticism by rights groups of the regime's treatment of minorities, in particular the Rohingya Muslims, who have been fleeing the repressive country by boat in large numbers.
The UN confirmed that Quintana would also visit the notorious Insein prison in Yangon that holds hundreds of political activists, as well as the remote capital, Naypyidaw, during his stay, but was unlikely to meet senior generals. Quintana's visit is expected to pave the way for a possible visit later in the year by UN Secretary General Ban Ki-Moon after another visit by the UN's Special Envoy to Myanmar, Ibrahim Gambari, last month.
Gambari met detained democracy leader Aung San Suu Kyi but failed to secure a meeting with Myanmar's head of state Senior General Than Shwe.
The military regime has promised to hold elections in 2010, but critics have dismissed the polls as a sham as they do not allow for the participation of Aung San Suu Kyi.
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