Both local rebel groups and Al-Qaeda affiliate Al-Nusra Front claimed credit for the opposition advance, which comes days after the jihadists expelled moderate rebels from their positions there.
Nawa is in Daraa province bordering Jordan, Damascus province and Quneitra, which has a boundary on the Israeli-occupied Golan Heights.
The rebel and Al-Qaeda advance came a day after regime air raids on a town held by the jihadist Islamic State group in northeastern Syria killed 21 civilians and wounded 100, the Observatory said.
"Al-Nusra Front, Islamist rebel brigades and (moderate) rebel brigades took over the whole of Nawa town," the Britain-based monitor said.
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"Regime warplanes then carried out more air strikes targeting the town and its surroundings," it added.
Local rebel groups issued a statement claiming that "now Nawa has been completely liberated".
Activists distributed amateur video showing rebel fighters shooting in the air, riding tanks and stamping on the Syrian flag that they consider to represent the regime they are fighting.
While not openly admitting that the army had withdrawn, state news agency SANA said troops were "redeploying and reorganising in the Nawa area... In order to prepare for upcoming fighting".
The development comes days after deep rifts between the Al-Nusra Front and moderate rebels in the northwestern province of Idlib led to the jihadist group expelling their rivals from their positions.
Speaking to AFP via the Internet, an activist in the southern province of Daraa said: "In the north, there are ideological differences between the (rebel) Free Syrian Army and Al-Nusra Front.
While suffering consecutive defeats at the hands of the army elsewhere in Syria, the rebels and Al-Qaeda have been steadily advancing in Daraa province.