The assault on the southeastern city of Mukalla, home to some 200,000 people, was part of a wider counter-offensive against the Sunni extremists launched by pro-government forces last month after a year in which they had focused their firepower on Shiite Huthi rebels who control the capital.
It comes as government and rebel delegations hold peace talks in Kuwait and after US President Barack Obama during a visit to Saudi Arabia called for a negotiated settlement that would enable both sides to turn their attention on Al-Qaeda.
The peace talks and Obama visit have contributed to a change in "strategic priorities", with Al-Qaeda back at the top, according to the Soufan Group consultancy.
The jihadists' Yemen-based branch, Al-Qaeda in the Arabian Peninsula (AQAP), is regarded by Washington as their most dangerous and the group's militants have come under repeated US air and drone strikes in and around Mukalla.
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Further west in Shabwa province, a US drone today struck two vehicles carrying Al-Qaeda militants near the town of Azzan -- from which the jihadists have fled -- killing nine extremists, a provincial official said.
"We entered the city centre and were met by no resistance from Al-Qaeda militants who withdrew west," a military officer told AFP by telephone from Mukalla.
The officer, who requested anonymity, said residents had appealed to the jihadists to spare the city the destruction of fighting and to withdraw.
Government troops were backed by special forces from Saudi Arabia and the United Arab Emirates, as well as coalition air strikes, commanders said in a statement published by the official Saudi Press Agency.
Troops deployed in Mukalla today and set up checkpoints across the city, security officials said.
"The operation resulted... In the deaths of more than 800 Al-Qaeda members and some of their leaders, while some others fled," the coalition commanders said.