"The Syrian Democratic Forces are now within about five kilometres of the strategic city of Manbij," said the monitoring group.
Manbij is located along a route connecting Raqa — the IS group's de facto capital in Syria — to the Turkish border, a vital conduit for supplies and foreign fighters.
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Thirty jihadists were also killed, it said, along with 12 SDF fighters.
After taking the village of Khirbet al-Rus, about 20 kilometres southeast of Manbij, the SDF rescued a group of Yazidis — six women and 16 children — who were being held captive by IS, the Observatory said.
The women and children were among hundreds of Yazidis taken captive in mid-2014 as IS carried out brutal massacres, enslavement and rape against members of the Yazidi minority.
US Central Command spokesman Colonel Patrick Ryder said on Saturday that SDF fighters had seized more than 100 sq.km of territory during the advance.
More than 55 air strikes have been carried out since the offensive began, he said, adding that the goal was to hamper IS's ability to move fighters, weapons, finances and supplies in and out of Syria and Iraq.
Some 3,000 Arab fighters were taking part in the offensive, backed by around 500 Kurdish militia members and also informed that US special forces were working at the command and control level in the operation.
Russian-backed Syrian troops are also advancing against IS in Raqa and on Saturday pushed into the province from the southwest, within 40 km of the Euphrates Valley town of Tabqa, site of the country's biggest dam.
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