Afghan forces fought back insurgents after they stormed Nawa district, just south of Lashkar Gah city, late Wednesday, raising alarm that the provincial capital was at risk.
But Afghan officials insist that they will not allow another urban center to be captured, after the Taliban briefly overran northern Kunduz city last September in their biggest victory in 15 years of war.
"The security situation in Lashkar Gah is under our control," said defense ministry spokesman Dawlat Waziri.
"We have retaken control of Nawa. Fighting is still going on in the outskirts but we are making progress with clearance operations," he told AFP, adding that dozens of Taliban were killed in the fight.
Fierce battles in recent days across Helmand, seen as the focal point of the insurgency, has sent thousands of people fleeing to Lashkar Gah, sparking a humanitarian crisis as officials report food and water shortages.
The turmoil convulsing the long-contested province, blighted by a huge opium harvest that helps fund the insurgency, underscores a rapidly unraveling security situation in Afghanistan.
Around 30,000 people have been displaced in Helmand in recent weeks, local officials said, with many of those fleeing to Lashkar Gah forced to abandon their lentil, maize and cotton crops during the lucrative harvest season.
"We left everything behind in Nawa -- our house, our grape and maize harvests. We fled with 15 members of my family to Lashkar Gah, fearing for our lives," Mohammad Ali, 40, told AFP in a camp in the provincial capital.
"For the last three days we have been surviving on bread and water. We will die of hunger."
The residents of Lashkar Gah said the city was practically besieged, with roads from neighboring districts heavily mined by the insurgents.