“The fighting was very heavy but we emerged victorious, there arecasualties on both sides,” a senior commander of the Azania militia group controlling the area told AFP by phone from the battleground.
Dhobley is under control of forces from the self-declared state of Azania, an anti-Shebab militia reportedly backed by Kenya to create a buffer zone along the troubled frontier.
“We have fully regained Dhobley after a fight, the Shebab were pushed out of the area,” the Azanian commander added, declining to be named.
Civilian casualties are reported to be high with fighting inside the town itself.
However, a senior Shebab commander said his fighters had made a tactical withdrawal a short distance outside the town after intense fighting.
“The enemy suffered heavy casualties as planned, and we will return back again when it is good for us,” said Sheikh Mohamed, claiming that Shebab fighters had also seized large stores of weapons from the town.
Dhobley is just five kilometres (three miles) from the Kenyan border, and is a key crossing point for people fleeing to the giant Dadaab refugee camps, some 100 kilometres (62 miles) into eastern Kenya.
Dadaab is the largest refugee complex in the world housing some 450,000 people, with 140,000 Somalis fleeing drought, famine or violence arriving this year alone, according to the UN refugee agency.
Civilians and fighters were reported to have crossed the border towards the Kenyan town of Liboi, while Kenyan tanks and helicopters were reported in the area.
The region is divided between rival militias, some led by Islamist fighters, some by clan leaders, others proxy forces of foreign powers.
Fighters from the Ras Kamboni militia, an anti-Shebab force also active in the area headed by former Islamist leader Ahmed Madobe, are reported to have suffered heavy casualties, including a senior commander.
Shebab fighters last month pulled out of positions in the war-torn capital Mogadishu where they were battling the weak Western-backed government, but they still control swathes of south and central Somalia.
The United Nations has declared six regions in south Somalia famine zones, the majority in Shebab-controlled areas.
Draconian aid restrictions imposed by the Shebab are blamed for turning harsh drought across the Horn of Africa into famine in areas they control, with 750,000 people at risk of death in coming months, the United Nations has said.
Drought, high food prices and fighting in Somalia have increased the number of those in need of humanitarian assistance across the Horn of Africa to 13.3 million, according to the UN.