The jihadists briefly took control of Jaar in southern Abyan province, which a military source described as a key link between main southern city Aden and Mukalla, the Qaeda- held capital of southeastern Hadramawt province.
A government official in the town said that the jihadists withdrew hours later after "carrying out an operation" to kill Ali al-Sayed, a commander of the pro-government "Popular Resistance" forces who have been fighting Iran-backed rebels.
Sayed and 10 of his forces were killed in the clashes, the official said.
Four Al-Qaeda fighters were killed in the clashes, the government official said.
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"Jaar is now free from Al-Qaeda and Popular Resistance committees," the source said, adding that the jihadists withdrew from the town towards provincial capital Zinjibar, where they already control government offices.
Seizing Jaar could secure the link between the jihadists' Mukalla stronghold and Aden, which houses the internationally-recognised government's temporary headquarters, according to the military source.
It would allow the militants to send reinforcements from Mukalla to Aden via Jaar.
But Islamist militants, including Al-Qaeda and the Islamic State group, appear to have gained ground in and around Aden, where jihadists are now visibly present.
As they entered Jaar, the jihadists blew up the main Popular Resistance headquarters and hunted down pro-government fighters, the majority of which fled the town, witnesses said.
Locals said that a militant leader announced over loudspeaker from the town's Grand Mosque that Al-Qaeda in the Arabian Peninsula (AQAP) had full control of "the emirate of Jaar" and that residents were now "safe" and life could go on "normally".