Islamic State West Africa Province fighters had stormed Kukawa town on Tuesday and took hundreds of hostages.

The Nigerian army on Thursday said it was in "full control" of a northeastern town where sources say hundreds of people had been taken hostage by rebels.

The Islamic State West Africa Province (ISWAP) fighters stormed the town Kukawa on Tuesday and seized hundreds of residents who had just returned after fleeing their homes about two years ago, according to local residents and militia sources.

"The terrorists on 18 August 2020 attacked troops' location in Kukawa town in Borno state where the attack was vehemently thwarted," defence spokesman John Enenche said in a statement.

"The situation in Kukawa is now calm with troops in full control," he said.

Kukawa's residents had returned to their homes on August 2 under military escort on the orders of the state government.

"The attack by the terrorists was ... a deliberate attempt to reverse the milestone achievements recorded regarding IDPs [internally displaced people] in the areas of peacebuilding, reconstruction, rehabilitation and resettlement efforts by the government," Enenche said.

Three soldiers lost their lives, two were wounded while eight rebels were killed during the gun battle with the attackers, he added.

The decade-long conflict with the rebels in northeastern Nigeria has forced about two million people from their homes, mostly in the northern part of Borno.

Many have moved into squalid displacement camps in Maiduguri and rely on handouts from international charities.