Mohammad Farooq, the government leader in the Arghandab district of Kandahar province, said around 500 Taliban fighters moved into his district and took over several villages.
Arghandab lies just north of Kandahar city - the Taliban's former stronghold - and a tribal leader from the region warned that the militants could use the cover from Arghandab's grape and pomegranate orchards to mount an attack on Kandahar itself.
"All of Arghandab is made of orchards. The militants can easily hide and easily fight," said Haji Ikramullah Khan. "It's quite close to Kandahar. During the Russian war, the Russians didn't even occupy Arghandab, because when they fought here they suffered big casualties."
The push into Arghandab comes three days after a sophisticated Taliban attack on Kandahar's prison that freed hundreds of insurgent fighters being held there.
NATO spokesman Mark Laity said NATO and Afghan military officials were redeploying troops to the region to "meet any potential threats."
"It's fair to say that the jailbreak has put a lot of people (militants) into circulation who weren't there before, and so obviously you're going to respond to that potential threat," he said.
Two powerful anti-Taliban leaders from Arghandab have died in the last year, weakening the region's defenses. Mullah Naqib, the district's former leader, died of a heart attack last year. Taliban fighters moved into Arghandab en masse last October, two weeks after his death, but left within days after hundreds of security forces were deployed there.
A second leader, police commander Abdul Hakim Jan, died in a massive suicide bombing in Kandahar in February that killed more than 100 people.
Elsewhere in Afghanistan, Afghan and U.S.-led coalition forces killed 35 militants in two skirmishes in the south, the coalition said Monday.
Twenty militants were killed in Zabul province after they attacked a combined patrol with rockets, mortars and gunfire. The combined forces returned fire and called in airstrikes against the insurgents in the Sunday battle.
Fifteen militants were killed in the Sangin area of Helmand province Saturday after a group of men in a treeline fired on Afghan and coalition troops. Two hours of fighting ensued, and military aircraft were again called in.
More than 1,900 people have been killed in insurgent violence in Afghanistan this year, according to Afghan and Western officials.