The attack on Gamboru Ngala comes after the town was almost entirely destroyed in May in a devastating assault that also left more than 300 people killed and prompted outrage at the lack of military response.
Many local residents sought refuge across the border in the north Cameroon town of Fotokol, where troop reinforcements were being sent, a security service source told AFP.
Boko Haram, which has been blamed for more than 10 000 deaths in a five-year-old uprising, has in recent weeks sought to take over a number of towns in Borno state, shifting from hit-and-run tactics to an apparent holding strategy.
The group's leader, Abubakar Shekau, declared in a video obtained by AFP on Sunday that the town of Gwoza, southwest of Gamboru Ngala, was now under an Islamic caliphate.
Residents said Monday's attack began at about 5:30 am (0430 GMT), with the extremists launching coordinated strikes on the main police station and a military base known as the Harmony camp.
"The sounds (of gunfire) became more deafening as police and soldiers responded to Boko Haram," said witness Hamisu Lawan. "Most of our people have fled into Cameroon."
Others locked themselves in their homes, voicing fears that the militants would turn their guns on civilians once they had overrun the police station and military camp.
Residents in Fotokol, which is separated from Gamboru Ngala by a river, also reported "intense" fighting throughout the morning.
"(Cameroonian) soldiers are at the bridge," one said.
Cameroon said on August 18 that it had closed its vast border with Nigeria to guard against the spread of Ebola, which has caused five deaths in the country's financial capital, Lagos, in the far southwest.
But few believed that Cameroon had the resources needed to seal all the possible crossing points along the roughly 1 600-kilometre (1 000-mile) frontier.
Territorial ambitions
Local officials and residents in Borno say Boko Haram may be in control of a key road that connects Gamboru Ngala to the state capital Maiduguri.
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