The soldiers have sealed off the Arghandab district just 30km north of Kandahar where the Taliban claims around 500 of its fighters are now in control of 10 villages.
Al Jazeera's Hashem Ahelbarra, reporting from Kandahar, said the authorities had imposed a curfew and soldiers were building defensive lines, taking up positions on rooftops and patrolling just about everywhere as they await reinforcements for a counterattack on the areas taken by the Taliban.
Mark Laity, a Nato spokesman, said Nato and Afghan troops were being redeployed to the region to "meet any potential threats".
The Taliban offensive comes just few days after a suicide attack on Kandahar's main jail freed more than 1,000 prisoners.
"It's fair to say that the jailbreak has put a lot of people [fighters] into circulation who were not there before, and so obviously you're going to respond to that potential threat," Laity said.
'Message'
And with hundreds of its fighters controlling a large area north of Kandahar, the Taliban seems to be sending a message that seven years after being toppled, it is still a major force in Afghanistan.
The Taliban said it met no resistance as it took control of the villages and announced plans to march towards Kandahar city.
Our correspondent said that hundreds of Taliban fighters had taken up positions in the area and taken over villages in a well organised manner.
But it was unclear if the group was just trying to make a statement as it did late last year when it captured the same area for just a few days before retreating under heavy bombardment by international forces, or if it would try to take back control of large swaths of the country.
Villagers flee
Local residents were paying a heavy price for the instability.
Mohammad Farooq, a government official in Arghandab, said on Monday that around 500 Taliban fighters moved into the area and took over the villages.
As soon as news of the Taliban takeover circulated, residents in Arghandab fled their villages, some of them with cattle and all their belongings.
The Taliban also told residents to leave.
"We left the area to protect ourselves from the bombing and the risks of a military confrontation. There are many Taliban fighters some told us they are more than eight hundred," one resident said.
Gholam Razeq, the district chief of Arghandab, said "the enemy wants to create insecurity in Arghandab which was the most secure area".
But while he said the Taliban takeover of the whole area was just a matter of time, he also vowed that "as soon as we get reinforcements we will attack".
However, Haji Ikramullah Khan, a tribal leader from the region, warned that the fighters could use the cover of the district's grape and pomegranate orchards to mount an attack on Kandahar itself.
"All of Arghandab is made of orchards. The fighters can easily hide and easily fight," he said.
"It is quite close to Kandahar. During the Russian war, the Russians didn't even occupy Arghandab, because when they fought here they suffered big casualties."