At least 23 peshmerga and militia fighters were killed and dozens were wounded in the fighting, medical and army sources said.
"We have liberated Jalawla and Saadiya," said Mala Bakhtiar, a senior official in the Patriotic Union of Kurdistan party, speaking by phone from a nearby town. He estimated 50 ISIL fighters may have been killed out of a force of 400.
Iraq's government, backed by US-led air strikes, has been trying to push back the ISIL since it swept through provinces of northern Iraq in June, meeting virtually no resistance.
Last week the army broke a months-long siege of the country's largest refinery north of Baghdad, but ISIL fighters continue to take territory in the western province of Anbar, which shares borders with Syria, Jordan and Saudi Arabia.
The militants have been fighting in the last two days to take full control of the Anbar provincial capital Ramadi. On Sunday, Iraqi and foreign jets struck ISIL fighters near central Ramadi, provincial council member Mahmoud Ahmed Khalaf told Reuters. Clashes continued in the city, he said.
Jalawla and Saadiya are located in Diyala province which is mainly under the control of the Baghdad government forces and Kurdish peshmerga.