Forces loyal to Libya's internationally recognised government seized a key central neighbourhood of second city Benghazi from Islamist militias on Tuesday, the military said.
The advance came as Libya's parliament again failed to vote on a UN-backed unity government seen as a crucial step in ending years of political chaos and conflict in the North African state.
Special forces retook the Benghazi area of Lithi, which had been a stronghold for extremist fighters including the Islamic State group, after days of fierce clashes.
Fadel al-Hassi of Libya's special forces said the neighbourhood was "totally liberated".
Libya has had rival administrations since the summer of 2014 when the recognised government fled Tripoli after a militia alliance including Islamists overran the capital.
A power vacuum since the 2011 toppling of dictator Moamer Kadhafi has fostered the rise of IS group, which is currently headquartered in the former dictator's hometown of Sirte, but control of Benghazi remains divided between a collection of militias.
Fighting has flared periodically in Benghazi as security forces try to wrest neighbourhoods from armed groups including IS group and Ansar al-Sharia, which is close to Al-Qaeda.
Lithi had become notorious as a jihadist nerve centre, dubbed by locals as "Benghazi's Kandahar" -- a reference to the Afghan province that has seen some of the worst insurgent attacks since the US invasion of 2001.
Residents celebrated alongside loyalist fighters in streets retaken from Islamists, flashing victory signs next to the bombed-out shells of buildings
Some even tried to enter Lithi to reach their homes but were prevented by security forces who said they needed more time to mop up the district, an AFP reporter said.
Meanwhile controversial army chief General Khalifa Haftar, who spearheaded the Benghazi battle, issued a video statement praising the latest breakthrough which he said was the fruit of "much patience".
Libya's conflict, which has help to create a surge in refugees fleeing the country, has alarmed Western governments over the prospect of extremist groups including IS group establishing a bridgehead just 300 kilometres (190 miles) from Europe.
Italy said on Tuesday it had given the US permission to use an airbase in Sicily to launch drone strikes against IS group in Libya.
Defence minister Roberta Pinotti told the daily Il Messaggero that any strike would be subject to an individual authorisation request to the Italian government and that they would only be used as a "last resort".
On Friday, US warplanes flying from a Royal Air Force base in Britain attacked an IS group training camp in the western Libyan city of Sabratha, killing more than 40 people including two Serbian diplomats being held hostage.
Successive UN-backed initiatives aimed at reuniting Libya's rival political factions have so far failed to find a route out of the crisis.
The internationally recognised administration, now exiled in the eastern town of Tobruk, failed on Tuesday to hold a vote of confidence in a new, UN-brokered unity government because it lacked a quorum.
"The required quorum (89 members of parliament) was not reached, so the president of the chamber adjourned the session," MP Mohamed al-Abbani told AFP.
Another parliamentarian, Ali Al-Qaidi, confirmed that "the necessary quorum was not reached, and the session for the vote was adjourned until next week".
UN envoy Martin Kobler voiced his disappointment at the postponement.
"Concerned by slowness of (political) process in Libya, overtaken by military events, must speed up to stop Da'esh expansion," Kobler tweeted, using the Arabic acronym for IS group.
Forces loyal to the Tobruk government launched a major operation at the weekend aimed at retaking areas of Benghazi under extremist control.
Loyalists have also seized Al-Marayseh port in the west of the city, as well as three army bases that had been overrun by Islamist fighters in southern and southeastern Benghazi.
Medical sources in Benghazi said Tuesday that more than 20 loyalist fighters had died since the launch of the latest offensive.
The foreign ministry in Tripoli, headquarters of the unrecognised government, denounced the Benghazi military operations as "unjustified" and an obstacle to peace.
In the coastal city of Derna, 300 kilometres east of Benghazi, six fighters died in clashes with IS group, a local official told AFP on Tuesday, adding that a senior member of the jihadist group was also killed.
Earlier this month the military announced that one of its fighter jets had been shot down as it carried out air strikes on opposition positions near Benghazi.