Afghan forces fought back insurgents after they stormed Nawa district, just south of Lashkar Gah city, late Wednesday, raising alarm that the provincial capital was at risk.
"The security situation in Lashkar Gah is under our control," said defence ministry spokesman Dawlat Waziri.
"We have retaken control of Nawa. Fighting is still going on in the outskirts but we are making progress with clearance operations," he told AFP, adding that dozens of Taliban were killed in the fight.
The turmoil convulsing the long-contested province, blighted by a huge opium harvest that helps fund the insurgency, underscores a rapidly unravelling security situation in Afghanistan.
Around 30,000 people have been displaced in Helmand in recent weeks, local officials said, with many fleeing to Lashkar Gah forced to abandon their lentil, maize and cotton crops during the lucrative harvest season.
Panicked Lashkar Gah residents said the city was practically besieged, with roads from neighbouring districts heavily mined by the insurgents.
"In Helmand, #Afghanistan, we're still running Boost hospital... As fighting nears," the international medical charity tweeted yesterday.
"We've shared coordinates of our 300 bed hospital to approaching warring parties in Helmand."
The Taliban effectively control or contest 10 of the 14 districts in Helmand, the deadliest province for British and US forces in Afghanistan over the past decade.
The United States has stepped up air strikes supporting Afghan forces on the ground, highlighting the intensity of the battle in Helmand.
Washington has deployed several hundred troops in Helmand in recent months.
The Taliban briefly captured northern Kunduz city in September last year, the first urban centre to fall to the insurgents in a stinging blow to Afghan forces.
As fighting escalates in Helmand, NATO and Afghan officials have repeatedly insisted that they will not allow another city to be captured.
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