Bolstered by Russian air strikes and ground troops, Syrian government forces have been battling through the desert for weeks to reach Palmyra.
The oasis city has traded hands several times during the six-year civil war and become a symbol of IS's wanton destruction of cultural heritage in areas under its control.
The jihadist group first seized Palmyra in May 2015 and began to systematically destroy and loot the UNESCO world heritage site's monuments and temples. IS fighters were driven out in March 2016 but recaptured the city last December.
"IS withdrew from most of Palmyra after laying mines across the city. There are still suicide bombers left in the eastern neighbourhoods," Observatory head Rami Abdel Rahman told AFP.
"Government forces have not yet been able to enter the heart of the city or the eastern parts," he added.
They have also not yet entered the celebrated ruins that make up the southwestern part of the city.
Before IS first entered the city, Palmyra boasted temples, colonnaded alleys and elaborately decorated tombs that were among the best preserved classical monuments in the Middle East.
But many of the monuments have been destroyed and much of the heritage looted for sale on the black market.
Moscow's support has been key in the Syrian army's push towards Palmyra, and its warplanes continued to bombard IS positions inside and near the city on Thursday, the Observatory reported.
A decades-old ally of Damascus, Moscow launched an air campaign in September 2015 to help President Bashar al-Assad's forces in their fight against what the regime and its allies say are "terrorists."
In the north, fighters of the US-backed Syrian Democratic Forces (SDF) announced they would cede several villages to the government as part of a deal brokered by Russia to avoid conflict with Turkey.
Turkey launched a cross-border operation in late August, that it said aimed to counter both IS and the SDF, which is dominated by Kurdish fighters that Ankara sees as "terrorists".
It said the territory to be handed over lay between Manbij and Al-Bab, which Turkish-backed fighters captured last week from IS, to create a buffer zone between them.
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