Thousands of civilians are trapped in Dikwa after Boko Harm insurgents took control of the town Monday night.
Soldiers had on Monday evening repelled an attack on the town.
But the insurgents returned hours later and overpowered the troops.
Residents say the insurgents are roaming the streets and preaching to locals not to flee the town.
Residents are being told the insurgents are on their side, correspondents in Maiduguri say.
It comes as troops reinforce to retake the town.
Dikwa town is about 90km from Maiduguri, the Borno State capital and has experienced several attacks from the insurgents since the liberation of the town in 2016.
The town also hosts the military Super Camp 9 where the Army Chief visited last week and ordered the retaking of Marte, which is about 20km away.
Bukar Ahmed, a resident of Dikwa, wept as he related how insurgents told his neighbourhood to stay on.
“They said we should stay, ‘we are not here to harm you but the soldiers’. Their motorcycles and gun trucks are in the town.
“Boko Haram are in control of Dikwa as I speak with you, they are roaming the streets; help us talk to President Buhari to save our soul,” he said, weeping in a phone call.
A humanitarian worker said insurgents went to the United Nations hub in Dikwa.
Details are not clear as troops engage insurgents.
“The situation in Dikwa is scary, thousands of civilians are trapped, we need a quick response from troops to save lives,” the worker said.
“The town is under siege; the government must mobilise resource to salvage the situation as soon as possible.”