Government troops and rebel forces are said to have traded blows in Malakal, the capital of Upper Nile state, with each side blaming the other for starting the violence.
The rebels have reportedly taken over the town, a development that is a big blow to South Sudan government’s revenue potentials.
But, Ateny Wek Ateny, spokesperson for President Salva Kiir, said government troops would fight back to reclaim the town.
UK broadcaster BBC quoted Wek Ateny as saying fighting broke out at around 4:30 local time.
“The rebels are using assault rifles – AK-47. And they have some RPGs [rocket-propelled grenades] and a number of other machine-guns. They are well-equipped,” he told the BBC World Service.
The rebels have reportedly accused the army of using Ugandan forces to bomb their positions.
Peace has largely reigned in the oil-rich nation following a truce agreed in Ethiopia in late January.
Fighting broke out in South Sudan’s capital Juba in mid-December after President Salva Kiir accused former vice president Riek Machar of plotting a coup – something the latter has denied.
Feuding quickly spread to other states, forcing the world’s newest nation to shut in about one fifth of its production.
South Sudan split from Sudan in July 2011, taking with it three-quarters of the original country’s oil reserves.
Khartoum relies heavily on revenues from oil production in South Sudan, which must use its neighbour’s midstream and port infrastructure for exports.