Islamist insurgents have seized control of a key town in northern Mozambique, close to where foreign companies are working on a $60bn (£52bn) natural gas project.

The militants staged an overnight attack on Mocimboa de Praia, taking a military base and raising their flag, police said.

The army and police have launched a counter-offensive, police added.

This is the first time Mozambican jihadists have attacked a major town.

They usually attack villages and farms.

Panicked residents said the fighters had blocked all exit routes, and they could not leave the town.

"They are taking residents to the mosque and locking them there," the privately owned Moz24h website quoted a resident as saying.

Hundreds have been killed and thousands displaced during the three-year insurgency in Cabo Delgado.

The government has battled to curb the insurgency, despite support from a Russian military company.

The militants call themselves al-Shabab although it is unclear whether they are linked to the significantly larger Somali movement of the same name.

Cabo Delgado is one of Mozambique's poorest regions, but it is rich in untapped mineral resources.

In 2010, Mozambique discovered huge gas reserves in Rovuma Basin, off the Indian Ocean coast of Cabo Delgado.

Last October, ExxonMobil unveiled plans to invest more than $500m in the initial construction phase of its gas project in the region.