"The Syrian Democratic Forces seized control of Tabqa and the adjacent dam," Rami Abdel Rahman of the Syrian Observatory for Human Rights told AFP.
Abdel Rahman said SDF forces were still combing through the city, which sits on the Euphrates River and on a strategic supply route about 55 kilometres west of Raqa, the Syrian heart of IS's so-called caliphate.
SDF spokesman Talal Sello told AFP that his forces had "achieved victory and completely liberated (Tabqa) city and the dam".
But IS mounted a fierce resistance, using car bombs, snipers, and weaponised drones.
More From This Section
US-led coalition air strikes have pounded Tabqa and nearby IS positions for weeks as part of the broader offensive for Raqa further east.
The assault on Raqa, an operation dubbed "Wrath of the Euphrates", was launched in November and has seen the SDF capture large swathes of countryside around the city.
More than 320,000 people have been killed in Syria since the country's war began with anti-government protests in March 2011.