Pro-government forces had pushed into the town, located 90 kilometres outside Baghdad, from the north two days earlier, fighting their way south.
"Forces from the army and the police and (militiamen) and tribal fighters succeeded today in regaining control of Dhuluiyah," an army major general told AFP.
The officer said that 50 military vehicles advanced from the north and linked up with allied forces in the town's southern Jubur area, which had resisted repeated assault by IS.
A leader in the Shiite Badr militia, which took part in the operation, confirmed the "complete liberation of Dhuluiyah".
"We succeeded in breaking the blockade which was imposed by (IS) on the Jubur tribe," the commander said.
People fired in the air and honked car horns in celebration, according to a policeman in the town, which is strategically located on roads linking the eastern province of Diyala to Salaheddin province in the north.
Omar al-Juburi, a leader of the tribal forces battling IS, said earlier that military reinforcements had arrived to carry out a renewed push to retake the town.
IS fighters have been carrying out "suicide attacks" on pro-government forces, he added.
Yesterday IS published pictures online showing what it described as battles in Dhuluiyah.
In one of the pictures, fighters are seen rigging a car with explosives. Another shows a man carrying out a suicide attack on government forces.
The Iraqi defence ministry said yesterday that government warplanes had carried out raids against jihadists positions in the town.
In October, Iraqi forces retook most of Dhuluiyah from IS, but the jihadists later launched a counter-offensive and were able to recapture ground.
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