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The Britain-based group said Kurdish fighters had seized control of the area after fierce clashes since Sunday night.
A US-led coalition against IS also carried out at least three air strikes against the jihadist group in the town on the Turkish border, the Observatory said.
At least 14 IS members were killed in the fighting, it added.
IS began its assault on Kobane in mid-September and came close to overrunning the town, which is also known as Ain al-Arab.
But Kurdish fighters, backed by international air strikes, have been able to gradually recapture territory in the small town, which is strategic because of its location on the border.
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A US-led coalition against IS also carried out at least three air strikes against the jihadist group in the town on the Turkish border, the Observatory said.
At least 14 IS members were killed in the fighting, it added.
IS began its assault on Kobane in mid-September and came close to overrunning the town, which is also known as Ain al-Arab.
But Kurdish fighters, backed by international air strikes, have been able to gradually recapture territory in the small town, which is strategic because of its location on the border.
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