Malian soldiers backed by French fighter jets are battling fighters in Timbuktu after they used a car bomb as cover to infiltrate the northern desert city, sources say.
A Malian soldier and three rebel fighters were believed to have been killed in Sunday's fighting in the ancient Saharan trading hub 1,000km north of the capital Bamako.
A Mali government communique issued on Sunday evening said at least one Malian soldier was killed and four others had been injured.
It said that 21 rebels were killed in the fighting.
"It started after a suicide car bombing around 2200 (2200 GMT on Saturday), that served to distract the military and allow a group of jihadists to infiltrate the city by night," Captain Modibo Naman Traore of the Malian army said.
France launched its intervention in Mali in January to halt an advance by northern al-Qaeda-linked fighters towards Bamako.
The ongoing attack reflects 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.
The French-led offensive has pushed the rebels out of their northern strongholds and remote mountain bases but they have hit back with several suicide attacks and guerrilla-style raids.
"People are really scared, but it is mostly due to the lack of information about what is happening in the city," Ousmane Halle, Timbuktu mayor, said.
This is the first major attack on the city since it was liberated by French forces on January 28.
Earlier this month a suicide bomber detonated himself at a checkpoint. That attack did not lead to an infiltration by the rebels into Timbuktu, as happened on Sunday.
Bilal Toure, a member of Timbuktu's crisis committee, said he saw a French plane firing on the rebel positions.
He said fighting had died down since nightfall.
"The situation settled down after around 1900 but everyone is still staying indoors," Toure said.
Rebels still present
Outside the heavily fortified cities like Timbuktu, the rebels are still present, leading an insurgency marked by suicide bombings, land mines and attacks on cities.
For 10 months until this January, Timbuktu as well as much of the rest of northern Mali had been ruled by Al-Qaeda in the Islamic Maghreb, or AQIM, and two other groups.
Separately, Mali's defence ministry said on Saturday that two Nigerian soldiers in the regional African force were killed when their convoy struck a mine outside Ansongo, near the Niger border.
President Francois Hollande said on Thursday that France will reduce its troop numbers in Mali to 2,000 by July and to 1,000 by the end of the year, down from 4,000 at present.
The West African former colony is to hold presidential and legislative elections in July - vital steps to stabilising the gold- and cotton-producer after a military coup a year ago paved the way for the northern rebel takeover.