The killing spree, which took place mostly inside Kobane itself, was widely seen as vengeance for a series of defeats inflicted on the jihadists by Kurdish militia in recent weeks.
At least 120 civilians were killed in a 24-hour rampage on Kobane, and another 26 were executed in a nearby village, the Syrian Observatory for Human Rights said.
The assault began yesterday when three IS suicide bombers blew up vehicles at the entrances to the town, which has become a symbol of Kurdish resistance.
"According to medical sources and Kobane residents, 120 civilians were executed by IS in their homes or killed by the group's rockets or snipers," Observatory director Rami Abdel Rahman told AFP.
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Local journalist Mostafa Ali said there was no military dimension to the assault.
"IS doesn't want to take over the town. They just came to kill the highest number of civilians in the ugliest ways possible," he told AFP.
The jihadists entered Kobane at dawn yesterday disguised as Kurdish People's Protection Units (YPG) fighters, said Ali.
They took up positions in buildings in the south of the town, using civilians as "human shields".
"There are at least 70 civilians in these various neighbourhoods that have been taken hostage by IS," Ali added.
"The YPG has sent reinforcements and have encircled the buildings, but the situation is difficult. The YPG doesn't want to hurt the women and children there."
More than 1,000 fleeing civilians waited on the Syrian side of the frontier with Turkey on Friday, carefully watched by Turkish troops and police on the other side.
Kobane was the scene of one of IS's most dramatic defeats in January when it was ousted by Kurdish militia backed by US-led air strikes after four months of heavy fighting.