Residents of the southern town of Malakal reported dead bodies in the streets and widespread looting after three days of violence.
"More than hundreds have been lost. The Sudan army sustained very heavy casualties and civilians were caught in the crossfire," Elias Waya Nyipuocs, a senior officer in the southern Sudan People's Liberation Army (SPLA), told Reuters news agency on Thursday.
Nyipuocs said militias belonging to the northern Sudanese Armed Forces attacked the SPLA and the local commissioner of Malakal.
The militiamen then took refuge in the SAF barracks near the airport and full combat began. "We were forced to overrun the barracks and the SAF fought side by side with the militia against the SPLA," he said.
Sudanese army tanks then counter-attacked and also shelled the town, inflicting many civilian casualties, Nyipuocs added.
Kofi Annan, the UN secretary-general, called the clashes "a serious violation" of the January 2005 agreement which ended Africa's longest civil war.
Around 10,000 UN peacekeepers are monitoring the 2005 deal, which created separate north and south Sudan armies with joint units in major towns. An autonomous southern government was also established.
Power and wealth was shared between the north and south, but implementation has been slow on key issues such as the demarcation of borders and ownership of the oil fields.
Malakal is the capital of the Upper Nile region, potentially one of the most oil-rich regions in Sudan, which produces at least 330,000 barrels per day.