Prime Minister Haider al-Abadi said the battle over the northern town of Baiji and its refinery - Iraq's largest - was critical to the fight against Islamic State.
The town, about 190 km (120 miles) north of Baghdad, has been a battlefront for more than a year since its seizure by the Islamists in June 2014 as they swept through much of northern Iraq toward the capital.
If Iraqi security forces and Shi'ite militia fighters regain full control around Baiji, it could help them push north toward the Islamic State-held city of Mosul and offset losses in the western province of Anbar.
"The Baiji battle is a challenge to the heart of Daesh and the fundamental existence of Daesh," Abadi said on Monday night, using an Arabic acronym for Islamic State. "Victory in this battle is critical to ending Daesh's presence in Iraq."
Abadi was speaking to military commanders during a visit to Salahuddin province where Baiji is situated.
A field commander told state television on Tuesday that Iraqi forces, supported by militia fighters and U.S.-led coalition air strikes, had regained control of the western suburb of Tel Abu Jarad.
Control of Baiji neighborhoods has changed hands many times during the conflict. Authorities said last month they had recaptured most of the town, but the radical jihadist group attacked central neighborhoods days later, forcing pro-government forces to pull back.
A police colonel was killed on Sunday and four police wounded in an ambush by Islamic State in eastern Baiji, a police source said.
Security forces and militia groups are also fighting Islamic State in Anbar province, the Sunni heartland in western Iraq, but advances have been slowed by challenging terrain, sectarian sensitivities and political tensions.
