Qayyarah lies on the western bank of the Tigris river, about 60 kilometres (35 miles) south of Mosul, the Islamic State group's last major urban stronghold in Iraq.
With the clock ticking down on what Iraq expects to be its biggest anti-IS operation yet, the UN warned of population displacement on a scale not seen in years.
"The operation started at dawn with the participation of Counter-Terrorism Service (CTS) and army forces," Brigadier General Firas Bashar told AFP.
"The operation is ongoing and currently achieving its goals," CTS spokesman Sabah al-Noman said.
"Qayyarah will be cleared and the operation wrapped up quickly, bolstering our plans... For the final battle to liberate Mosul," he told AFP.
He said Iraqi forces had been working with armed residents inside the town for this offensive, a rare occurrence.
"There has been coordination with groups of armed residents inside," Noman said, declining to provide further details.
Iraqi forces have spent weeks positioning themselves around the town, which is expected to be used as a launchpad for a broader operation against Mosul in the coming weeks or months.
"Worse is yet to come," the UNHCR representative in Iraq, Bruno Geddo, said. "We predict that it could result in massive displacement on a scale not seen globally in many years."
Nearly 3.4 million people have already been displaced in Iraq since the start of 2014.
Mosul is Iraq's second city and had an estimated population of around two million before IS took it over in June 2014 in an offensive that sparked large-scale displacement.
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