Al Qayyara, around 70 kilometres south of Mosul, was captured by the IS in June 2014, Efe news reported.
The official said the jihadist group was now "stopping civilians from fleeing in order to use them as human shields" during an expected manoeuvre by Iraqi troops to liberate the city.
The Iraqi army, supported by some 700 tribal combatants, was prepared to attack the IS bastion, and had already liberated most surrounding areas, said the official.
In order to delay the offensive, the IS burned oil wells and the smoke hid the area from aerial operations.
The toxic fumes from the fires killed 30 civilians in Al Qayyara, said the official.
Mosul and its surrounding areas have been in the hands of the IS since 2014, when it declared a caliphate in the Iraqi and Syrian territories it had conquered.
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