Mozambique says its troops are fighting to regain control of the key port of Mocimboa da Praia, after several reports that it fell on Islamic militants on Wednesday.
The city is close to the site of natural gas projects worth $ 60 billion (£ 46 billion).
The army says there is ongoing action to neutralize the military forces with groups belonging to the Islamic State, which have used local people as shields.
It follows days of fighting for the port in the land-rich north of the country.
Dozens of soldiers are reportedly killed, and a patrol boat sank, while the army says it has killed about 60 militants.
BBC Africa correspondent Andrew Harding says the loss of the city was a serious blow to Mozambique’s army, which is struggling to contain a growing uprising in the gas-rich province of Cabo Delgado.
Mocimboa da Praia is used for freight transportation to offshore projects about 60 km (40 miles) away, which are being developed by oil giants including Total.
The militants have seized a number of northern cities in recent months and displaced tens of thousands of people. This was one of several attacks on Mocimboa da Praia this year.
Tanzania has also said it will launch an offensive against jihadists in forests along the border with Mozambique.
Weaknesses exposed
Mozambique’s defense forces have acknowledged that the battle for Mocimboa da Praia is not over.
But the events of the past week have exposed both the weaknesses of the army, and the growing strength and sophistication of an Islamist insurgency that is now emerging from the shadows to become a major regional threat.
Several reports suggest that government troops were forced to make a humiliating retreat from the strategic port, after ammunition ran out.
In recent months, the rebels have recently overrun several cities in the region, in part, it seems, for propaganda and recruitment purposes.
Some of the largest energy companies in the world are now seeking additional protection as they prepare to exploit Mozambique’s massive gas fields.
The government has sought some help from foreign security contractors. But so far, it seems reluctant to reach out to immediate neighbors for immediate military assistance.
Attacks began in 2017 in the northern province of Cabo Delgado, but escalated this year after the responsible group, Ahlu Sunnah Wa-Jama, loyal to IS.
Earlier this week, IS claimed, though its own media channels, that it had taken over two military bases near Mocimboa da Praia, killing Mozambican soldiers and seizing weapons rights, including machine guns and rocket-propelled grenades.