(Recasts with state media report, pro-Damascus source)
By Tom Perry and Laila Bassam
BEIRUT, Aug 20 (Reuters) - Syrian government forces looked set to recover a strategic town that has been in rebel hands since 2014 in a major Russian-backed offensive into the opposition's last major stronghold.
An organisation that monitors the war and a pro-Damascus military source said insurgents had withdrawn from Khan Sheikhoun overnight, though the main insurgent group in the area said rebels still held part of the town and fighting continued.
Capturing Khan Sheikhoun would be an important gain for President Bashar al-Assad into the northwestern region where his bid to recover "every inch" of Syria has hit complications including Turkish forces on the ground.
Syrian state media, in a broadcast from near the town, reported that government forces had widened their control including by seizing a highway running through Khan Sheikhoun, which was targeted in a sarin gas attack in 2017.
The pro-Damascus military source told Reuters the town was under army control after the rebels were caught in a pincer movement and fled.
"There are some pockets and explosive devices, there are a few who refuse to withdraw and want to die," the source said.
The Syrian Observatory for Human Rights, a UK-based war monitoring group, said rebels had withdrawn from their last piece of territory in neighbouring Hama province in addition to Khan Sheikhoun.
The most powerful insurgent group in the area, the jihadist Hayat Tahrir al-Sham, denied this and said the battle continued.
In a statement on its Telegram channel, Hayat Tahrir al-Sham said rebels still held part of Khan Sheikhoun and nearby areas in northern Hama despite what it described as a redeployment in the town after fierce enemy bombardment.
The Observatory and the pro-Damascus military source said Syrian rebels had withdrawn to a Turkish military position in the town of Morek, to the south of Khan Sheihkoun in Hama province.
Negotiations were underway between Turkey and Russia over the withdrawal of the Turkish position, the pro-Damascus source said.
Turkish Foreign Minister Mevlut Cavusoglu said Turkey would not remove the observation post located near Morek, which a Turkish convoy was trying to reach on Monday when it came under attack.
Turkey, which backs some of the rebel groups in the northwest, has established a dozen military positions in the area under agreements with Russia. One of its main concerns is to prevent a further influx of Syrian refugees fleeing government control. Some 3.6 million Syrian refugees already live in Turkey.
Syrian government forces stepped up military operations against the northwestern region in late April, in an offensive that has killed hundreds of people and forced hundreds of thousands of people to flee toward the Turkish border.
Assad has defeated his rebel opponents across much of the country with help from Russian and Iran-backed forces.
LONG-HELD REBEL TOWN
Khan Sheikhoun has been in rebel hands since 2014. The opposition's territorial foothold in neighbouring Hama dates back to the earliest days of the eight-year conflict.
Russian-backed Syrian government advances around Khan Sheikhoun had threatened to encircle rebel fighters in their last remaining territory in northern Hama, including the towns of Latamneh and Kafr Zeita.
Local activists and the Observatory said the rebels had quit those towns.
The Turkish military convoy was targeted in an air strike on Monday after it entered the territory. Rebel sources said the Syrian government had targeted it.
Syrian state media said the despatch of the convoy into Syria was an act of aggression and it had entered to help insurgents fighting an army advance in Khan Sheikhoun.
In 2017, the sarin gas attack that hit Khan Sheikhoun killed dozens of people and prompted U.S. missile strikes against the Syrian government.
An investigation conducted by the United Nations and the Organisation for the Prohibition of Chemical Weapons said the Syrian government was responsible for releasing sarin on the town then. Damascus denies using such weapons.
The U.S.-based Union of Medical Care and Relief Organizations (UOSSM), which supports medical facilities in the northwest, says more than 730 civilians have been killed by government or Russian forces since late April.
The U.N. Office for the Coordination of Humanitarian Affairs has said more than 500 civilians have died in hostilities.
(Additional reporting by Ellen Francis in Beirut and Khalil Ashawi in Turkey Writing by Tom Perry Editing by Andrew Heavens and Frances Kerry)
Our Standards: The Thomson Reuters Trust Principles.