This meant Islamic State will be able to move along a road leading north to the Bab al-Salam border crossing between the Syrian province of Aleppo and the Turkish province of Kilis, the Syrian Observatory for Human Rights said.
The town`s loss is a blow to rebels grouped in the so-called Jabhat al-Shamiyya alliance (Levant Front), because the area sits on an important supply route to bring weapons into eastern Aleppo, two fighters said.
"The main supply line between Turkey and Aleppo will be severely affected," said Abu Bakr, an alliance field commander, said in a online message.
The Levant Front was created in Aleppo in an effort to forge unity among factions in Syria that have often fought each other as well as the Syrian army and hardline jihadist groups, undermining the revolt against President Bashar al-Assad.
Rebels said the Islamic State gains had upset plans for a wider offensive that was being prepared ahead of the Muslim holy month of Ramadan to seize government-controlled parts of Aleppo.
Residents in eastern Aleppo said convoys of rebel fighters were now heading back to areas in the Soran countryside to try to repel Islamic State. The west of the city is held by government forces.
Islamic State`s next stop could be Syria`s Azaz city, 10 km (6 miles) further north east and a gateway to the border crossing close by, the Observatory added.
"A small advance by Daesh would get them to Azaz," said another rebel from the Nour al-Din al-Zenki brigade, which is in the Levant Front. Daesh is an Arabic acronym for Islamic State.
The city of Azaz, flooded with thousands of refugees fleeing violence across northern Syria, has also been a major arms route and commercial thoroughfare for hundreds of trucks carrying Turkish goods to rebel-held areas in Aleppo and Idlib provinces.
U.S-led forces bombing Islamic State in Syria and Iraq carried out their latest raids on Sunday near the city of Kobani close to the Turkish border and Syria`s northwestern Hasaka province, but did not hit Aleppo and surrounding areas.
Islamic State holds swathes of territory across Syria and Iraq, and has advanced rapidly in other parts of Syria in recent weeks, capturing the central city of Palmyra and the last border crossing between Syria and Iraq in the east.
The group is fighting both rival insurgents, the Syrian military and Kurdish forces in the four-year-old conflict. Their advances bring them closer to Kurdish-controlled Afrin town.
In the northwestern Hasaka province, a fire in a clinic caused by a gas explosion killed at least 24 people including children in Qamishli city, the Observatory said.
Syrian air force strikes on Saturday in al-Shadadi town in the province had killed 43 Islamic State fighters and 22 civilians, it added.
Kurdish YPG forces have been battling Islamic State in Hasaka, a strategic province for all sides in the conflict due to its position next to Islamic State-held territory in Iraq.
Islamic State appeared to be losing land around Tal Abyad town, which lies north of its stronghold Raqqa city. Tal Abyad is one of the few remaining towns along the border with Turkey in Islamic State control, Kurdish and Arab tribal sources said.
Tal Abyad is Islamic State`s main access point to Turkey from Raqqa. Its capture would allow Kurdish forces to link up territory in Aleppo with their strongholds in the Hasaka and Qamishli provinces, defense experts say.
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