Authorities sealed off the nearby beach resort town of Djerba, a popular destination for foreign and local tourists, and closed two border crossings with Libya.
It was not immediately clear if the attackers crossed the border, but Monday's assault was the type of militant operation Tunisia's government had feared as it prepares for potential spill over from Libya, where Daesh (ISIL) militants have expanded their presence.
Local television broadcast images of soldiers and police crouched in doorways and on rooftops as gunshots echoed in the centre of the town. Bodies of dead militants lay in the streets near the army barracks, local residents said.
"I saw a lot of militants at dawn, they were running with their Kalashnikovs," Hussein, a resident, told Reuters by telephone. "They said they were Daesh and they came to target the army and the police."
Soldiers killed 21 militants and arrested six after they attacked military and police posts, the Interior Ministry said. Hospital sources said at least seven civilians were killed along with a soldier and a customs agent.
While Tunisia has been held up as a model of democratic transition since its 2011 uprising against ruler Zine El-Abidine Ben Ali, the North African country is also caught up in a struggle with militancy.
More than 3,000 Tunisians have left to fight with Daesh and other groups in Syria and Iraq. Tunisian security officials say increasingly they are returning to join the militant group in Libya over the border.
Since the fall of Muammar Gaddafi five years ago, Libya has slipped into chaos, with two rival governments and armed factions struggling for control. Daesh has grown in the turmoil, taking over Sirte city and drawing foreign recruits.