Militants ambushed the town in Cabo Delgado province on Wednesday and have now seized its control after government forces withdrew, security sources say.
Militants have seized control of the northern Mozambique town of Palma, killing several people including at least one foreign worker, near a huge gas project involving France's Total and other energy companies, security sources said.
"Government forces have withdrawn from Palma so the town has been taken," one security source told AFP news agency.
Another source confirmed militants had taken the town though fighting in the area was ongoing.
Militants attacked the town in northern province of Cabo Delgado on Wednesday, forcing nearly 200 people including foreign oil workers to be evacuated from a hotel where they had sought refuge.
About 180 people, including expatriate gas workers trapped for three days in a hotel after an insurgent attack were evacuated overnight but some died in an ambush after they left, security and diplomatic sources said.
No one was left behind at the besieged Amarula Palma hotel that came under attack, a hotel worker told AFP on phone.
Mobile phone communication with the area, situated near the Tanzanian border and the hub of a huge gas exploration project, has been disrupted since the assault began.
French oil giant Total is principal investor in region
Around 80 people were taken away from the hotel in military trucks on Friday, but some of the trucks were ambushed, said an official from a private security firm involved in the rescue operation.
There has been no comment from the government since Thursday.
A military official would not confirm any details, but said the defence minister would likely speak later.
French oil giant Total is the principal investor in the $20 billion gas project in Cabo Delgado province. Six other international firms including ExxonMobil are also present in the region.
Militants affiliated to Daesh have raided villages and towns across Mozambique's north, causing nearly 700,000 to flee their homes.
The violence has left at least 2,600 people dead, half of them civilians, according to the US-based data collecting agency Armed Conflict Location and Event Data (ACLED).
'Bodies on the streets'
Some people were killed, including a South African, in an ambush during an overnight rescue operation led by the military, security sources and some surviving workers said, though details were not immediately available on their numbers or nationalities.
Local media reported at least seven workers were killed during the ambush.
Speaking on the phone late Friday, after he was evacuated to Afungi, one worker said most of the town had been destroyed and "many people are dead".
Human Rights Watch said witnesses had spoken of seeing "bodies on the streets and residents fleeing after the ... fighters fired indiscriminately at people and buildings".
The government has not given an update of the attack since Thursday.
Human Rights Watch said the attackers were affiliated to a group known locally as Al Shabab, which is not linked to a Somali militant group with the same name.
"Several witnesses told Human Rights Watch that they saw bodies on the streets and residents fleeing after the Al Shabab fighters fired indiscriminately at people and buildings," the rights group said in a statement on Friday.
The militant attack on Palma, a coastal town of 75,000 people, is the closest yet to the major gas project during a three-year insurgency across Mozambique's north. Gas exports from the site are not expected until 2024 at the earliest.
Militants staged the surprise raid, sending terrified residents into nearby forests, while gas and government workers sought shelter at the hotel.
Defence ministry spokesman Omar Saranga declined to comment, only urging people to "remain calm and follow the rescue instructions given by the authorities".
The attacks began just hours after Total announced a gradual resumption of work at the liquified natural gas project, which had been hampered by the ongoing insurgency in the region.
In a statement Friday, the US embassy in Maputo condemned the attack on Palma, pledging its commitment "to working with the government of Mozambique to counter violent extremism".