"Our forces have taken the whole of Al-Rayhanna village, attacking from three directions, and have killed seven terrorists," an Iraqi colonel told AFP.
Some ISIS fighters had fled towards the town of Anna, "eight kilometres (five miles) to the west, which is our next objective", he said.
The Joint Operations Command coordinating the fight against ISIS in Iraq said infantry and armoured units backed by the Hashed al-Shaabi paramilitary alliance launched the assault at dawn to retake Al-Rayhanna and the nearby town of Anna.
The operation was supported by Iraqi army helicopters and warplanes from the US-led coalition battling ISIS in Iraq and Syria, a general in the area said, speaking on condition of anonymity.
The head of Anna's municipal council, Abdel Karim al-Ani, confirmed Iraqi forces had taken control of Al-Rayhanna and raised the Iraqi flag on public buildings.
The colonel said coalition aircraft had destroyed a suicide car bomb driven by a jihadist who was trying to reach security forces to detonate the vehicle.
Anna, about 100 kilometres (60 miles) east of the border with Syria, is one of three towns in Anbar province still under ISIS control.
After retaking the town, Iraqi forces are expected to target Rawa to the northwest and finally Al-Qaim, which is close to the border with the Syrian province of Deir Ezzor.
Three years after ISIS took control of large parts of Syria and Iraq, Iraqi forces are pushing to retake all areas seized by the jihadists, scoring their biggest victory in July with the recapture of second city Mosul.
Iraq is preparing to launch an assault against another of the jihadists' remaining strongholds, the town of Hawija about 300 kilometres (185 miles) north of Baghdad.
ISIS is also under pressure in Syria, where a US-backed alliance of Kurds and Arabs is battling to retake the jihadists' de facto capital Raqa and Russian-backed regime forces are fighting for control of the city of Deir Ezzor.