The French-led offensive in Mali has pushed a mix of Islamists out of their northern strongholds and remote mountain bases but the militants have hit back with several suicide attacks.
At least three Malian soldiers were injured in Sunday's fighting in the ancient Saharan trading hub 1,000 km (600 miles) north of the capital Bamako, and residents were forced to take shelter indoors, Mali army Captain Modibo Naman Traore said.
"It started after a suicide car bombing around 2200 (6:00 p.m. EDT), that served to distract the military and allow a group of jihadists to infiltrate the city by night," he said.
"The fighting is heavy and it is ongoing. We are in the process of encircling them."
Bilal Toure, a member of Timbuktu's crisis committee set up after the town was recaptured from Islamist control in January, said he saw a French plane firing on the rebel positions.
Officials did not say how many rebels were in the town.
The attack reflected the challenge of securing Mali as France prepares to reduce its troop presence and hand over to the ill-equipped Malian army and a more-than 7,000-strong regional African force.