The advance came as Libya's parliament again failed to vote on a UN-backed unity government seen as a crucial step in ending years of political chaos and conflict in the North African state.
Special forces retook the Benghazi area of Lithi, which had been a stronghold for extremist fighters including the Islamic State group, after days of fierce clashes.
Fadel al-Hassi of Libya's special forces said the neighbourhood was "totally liberated".
Libya has had rival administrations since the summer of 2014 when the recognised government fled Tripoli after a militia alliance including Islamists overran the capital.
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Fighting has flared periodically in Benghazi as security forces try to wrest neighbourhoods from armed groups including IS and Ansar al-Sharia, which is close to Al-Qaeda.
Lithi had become notorious as a jihadist nerve centre, dubbed by locals as "Benghazi's Kandahar" -- a reference to the Afghan province that has seen some of the worst insurgent attacks since the US invasion of 2001.
Some even tried to enter Lithi to reach their homes but were prevented by security forces who said they needed more time to mop up the district, an AFP reporter said.
Meanwhile, controversial army chief General Khalifa Haftar, who spearheaded the Benghazi battle, issued a video statement praising the latest breakthrough which he said was the fruit of "much patience".
Libya's conflict, which has helped to create a surge in refugees fleeing the country, has alarmed Western governments over the prospect of extremist groups including IS establishing a bridgehead just 300 kilometres from Europe.
Defence minister Roberta Pinotti told the daily Il Messaggero that any strike would be subject to an individual authorisation request to the Italian government and that they would only be used as a "last resort".