The Kurds have been struggling to carve out an autonomous region similar to one in northern Iraq, further complicating the war pitting Sunni-led rebels against President Bashar al-Assad's regime.
The rebels have increasingly turned their guns on each other in past few months, with jihadists fighting the mainstream Free Syrian Army in the north, where the insurgents control vast swathes of territory.
The loss of Al-Yaarubia would deny ISIL -- an Al-Qaeda affiliate that has carried out major attacks on both sides of the border -- a vital conduit for fighters and arms.
Meanwhile, the Al-Nusra Front, another Al-Qaeda-linked group, denied a Syrian state TV report that its leader, Abu Mohammed al-Jawlani, had been killed.
On other battlefronts, rebels seized the town of Tafas, which links the eastern and western sectors of Daraa province along the Jordanian border, the Observatory said.
And scores have been killed in clashes over the past week between troops and rebels for control of a large, highly strategic arsenal in Mahin, in the central province of Homs, it added.
"There have been at least 100 killed from among the ranks of the army and dozens more among the rebels and jihadists, which include foreign fighters," Observatory director Rami Abdel Rahman said.
Rebel Lieutenant Osama Idris said "the fighting is fierce because this arsenal is packed with so many arms that we could free all of Syria with them."
The conflict flared when Assad's opponents took up arms in response to his regime's brutal crackdown on Arab Spring-inspired protests that erupted in March 2011.
More than 115,000 people are estimated to have been killed. Millions more have been uprooted from their homes, and a UN official said Friday that hundreds of thousands are trapped by the relentless fighting.
Brahimi says Iran 'necessary' for peace efforts
As the violence raged, UN-Arab League envoy Lakhdar Brahimi said in Tehran that Iran's participation in mooted international peace talks on Syria was "necessary," Iranian news agencies reported.
"We think the participation of Iran at Geneva 2 is natural and necessary," Brahimi said at a joint press conference after talks with Iranian Foreign Minister Javad Zarif.
But he stressed that no invitations have yet been sent out for the conference, which the United Nations hopes to organise for late November.
Zarif, whose country is a Damascus ally, said that "if Iran is invited to take part in Geneva 2, we will be there to help find a diplomatic solution."
Despite pressure from its Western and Arab backers, the fractured Syrian opposition has yet to decide whether to attend, insisting that the question of Assad's departure must be on the table.
Damascus says that is not negotiable.
Saturday's violence comes a day after a car bomb outside a mosque in Suq Wadi Barada, near Damascus, killed at least 40 people and wounded dozens more, according to the Britain-based Observatory.
State news agency SANA said "the car exploded while the terrorists were packing it with explosives," using the regime term for rebels.
The opposition National Coalition blamed the regime for the "massacre" caused by what it said were two car bombs placed outside the Osama Bin Zeid mosque.
Elsewhere, an army ambush killed 24 rebels on the outskirts of Damascus, said the Observatory. SANA put the toll at 40.
The army has closed in on Eastern Ghouta, a ring of rebel-held suburbs it has besieged for months and which was targeted in an August chemical attack that killed hundreds of people and almost led to punitive US strikes.
UN and US officials have expressed concern about Eastern Ghouta and other besieged Damascus suburbs, following reports of severe food shortages and rising malnutrition there.
A UN-commissioned report said more than half of Syria's population is living in poverty and warned that the economic devastation could last for years.