State television confirmed the news, reporting: "Syrian army units have advanced in the Yabrud area and now control its eastern approaches and northeastern boundary."
The broadcaster said the offensive had caused a "breakdown in the ranks of terrorist groups", the government term for rebels battling President Bashar al-Assad.
Hezbollah, spearheading the fight to dislodge insurgents from Yabrud, and Syrian forces "drove the rebels off the hill of Aqaba" outside the town, said the Observatory, which relies on civilian, medical and military sources for its information.
"Fierce fighting is also taking place on the northern edge, between the town of Sahel and Yabrud," he added.
"They want to completely encircle the Yabrud rebels to dislodge them."
The Al-Qaeda-linked jihadist group Al-Nusra Front admitted "one position at Aqaba has fallen... Causing brother fighters to fall back to rear bases".
But it denied rebels were retreating, insisting reinforcements were on the way.
An activist in the region confirmed to AFP the army and Hezbollah had taken a position at Aqaba some five kilometres from Yabrud.
Hezbollah wants to sever a key rebel supply line to the Sunni town of Arsal across the border in eastern Lebanon.
It says car bombs that have been used to attack it inside Lebanon were loaded with explosives in Yabrud and then driven via Arsal to their targets.
On another front in the complex struggle pitting regime loyalists against mainstream rebels and rebels against jihadists of the Islamic State of Iraq and the Levant, ISIL today withdrew its fighters from Idlib province in the northwest and Latakia in the west, the Observatory said.
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