Tunisian troops clashed on Wednesday with around 50 armed jihadists in the remote Mount Chaambi border region, a security source said, the first such operation since the revolution in January 2011.
"The group consists of more than 50 Salafi jihadists," the source told AFP, adding that they were well armed and some were veteran Islamist militants who had come from northern Mali.
An AFP journalist nearby reported hearing an exchange of gunfire in the area, close to Tunisia's border with Algeria, which was surrounded by soldiers and patrolled by helicopters.
The group is commanded by an Algerian and two Tunisians originally from the regional capital, Kasserine, the security source said.
On Monday, Tunisian forces began their hunt for the group holed up in the mountainous region. Authorities simply described them as "terrorists," refusing to give any further details because the operation was ongoing.
The gunmen laid homemade land mines in parts of the region which have already wounded around 10 soldiers and members of the national guard, some seriously, during the operation to flush them out.
The group originally consisted of 11 fighters for whom the Tunisian security forces have been searching since December, when they attacked the Bou Chebka border post and killed a member of the national guard.
"They then recruited some youths from Kasserine and men who had come from Mali," said the security source, without explaining how he got the information.
"Yesterday (Tuesday) we found grenades, military and homemade bombs, documents on how to make homemade bombs, coded documents, maps and mobile phones being used to make calls abroad," he added.
Unlike earlier in the week, Wednesday's operations were being carried out by the army, which has the only units capable of detecting land mines. The national guard, or auxiliary police, are playing a secondary role.
Bassem Haj Yahia, a guard who lost a leg after one of the bombs exploded, said the army was facing an organised and well-armed adversary.
"It's like they are installed in a small village where they have their hideouts, a training site and some equipment," he told private radio station Mosaique FM.
The standoff in Mount Chaambi is the worst of its kind since clashes in 2007 between the army and Islamists in Soliman, near Tunis, under Zine El Abidine Ben Ali. A soldier, two policeman and 11 Islamists died.
Since the mass uprising that toppled Ben Ali more than two years ago, radical Islamists suppressed by the former dictator have become increasingly assertive and been blamed for a wave of deadly attacks across the country.
The current government, led by the moderate Islamist party Ennahda, has fully recognised in recent months the jihadist threat facing Tunisia. It has warned that groups linked to Al-Qaeda in the Islamic Maghreb were infiltrating its borders.
The danger posed by militant Islamists and the porosity of the region's borders was starkly illustrated by the deadly hostage attack on Algeria's In Amenas gas plant in January. Eleven of the 32 assailants were Tunisian.
Prime Minister Ali Larayedh said this week that terrorism had "no future" in Tunisia, insisting that the will of the people and the security of the country would triumph.
But the opposition strongly criticised the government on Wednesday, accusing it of failing since coming to power to rein in the Salafists, despite the security problems they have caused since the revolution.
"The government, and the interior ministry in particular, takes responsibility for not providing these (security) units with the means of intervention and prevention needed to properly carry out their mission," said secular opposition party Al-Massar.
"The country is sinking into the vortex of terrorism (which) threatens its integrity and the security of its citizens," it warned.