Mosul Iraq offensive: Kurdish forces besiege key town of Bashiqa
Peshmerga fighters have surrounded Bashiqa, which lies on a crucial supply route only 12km (8 miles) from Mosul, on three sides, a commander said.
But the threat of suicide bomb attacks means they are advancing with caution.
The Iraqi military has meanwhile denied that Turkish forces are involved in the battle for Bashiqa.
Turkey's government said on Sunday that troops stationed at a nearby base had provided artillery support following a Peshmerga request.
This is the second time that the Peshmerga have tried to seize control of Bashiqa.
Last week, they had to abandon the attack after fierce fighting with heavily armed IS militants inside the town.
But now they seem to be making progress, says the BBC's Richard Galpin in the Iraqi Kurdish capital, Irbil.
A senior Peshmerga commander, Gen Said Hazhar, said Bashiqa had been "encircled" and his troops were digging trenches around the town in preparation for an assault, the Kurdish news agency Rudaw reports.
They were also reported to have cut off the main road between Bashiqa and Mosul, a major route into the city that fell to IS in June 2014.
In a significant development on Sunday, Turkish Prime Minister Binali Yildirim announced that Turkish troops - who have been training Peshmerga and Sunni Arab tribal fighters near Bashiqa - were involved in the battle, despite strong objections from the Iraqi government.
Journalists on the front line also reported seeing artillery fire coming from the Turkish base and targeting IS positions on several occasions.
But the Iraqi military's joint operations command denied "Turkish participation of any kind in operations for the liberation of Nineveh" province.
US Defence Secretary Ashton Carter had suggested before his visit to Iraq over the weekend that Turkey should be given a role.
Iraqi Prime Minister Haider al-Abadi firmly rejected the idea and said he would tell Turkey: "This is something the Iraqis will handle."
Source: bbc.com