According to the Syrian Observatory for Human Rights, pro-regime Jaysh al-Wafaa launched its "fiercest battle yet" on Saturday night against Jaysh al-Islam fighters near the rebel bastion of Douma, east of the capital.
"The fighting is ongoing now," Observatory director Rami Abdel Rahman told AFP on Sunday.
Jaysh al-Wafaa, whose name in Arabic roughly translates as "The Loyalists' Army", was formed some three months ago, more than a year into a suffocating regime siege of the Eastern Ghouta area, which includes Douma.
The militia's task is to confront Jaysh al-Islam, the best-armed opposition group in the Damascus area, according to the Observatory and activists in Douma.
President Bashar al-Assad's regime "is financing and arming Jaysh al-Wafaa", Abdel Rahman said.
"Among its ranks are armed men who, after more than a year under siege, handed themselves in to the regime," Abdel Rahman told AFP.
"Because of the siege, some people prefer to evacuate their children and have a chance at survival, rather than stay put and die either from hunger or because of the bombings."
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He said Jaysh al-Wafaa "provides a way for fighters to be free both from the regime siege, and from (Jaysh al-Islam chief) Zahran Alloush", who is notorious for his abuses.
Douma, which emerged early in Syria's conflict as an important anti-regime bastion, is now under Jaysh al-Islam's control.
Tens of thousands trapped in the siege suffer from food and medical shortages, as well as deadly regime bombardment.
A source close to Assad's regime and a Jaysh al-Islam spokesman both confirmed to AFP that a battle was taking place.
"Jaysh al-Wafaa was set up three months ago by people from Douma and former rebels," the pro-government source said.
"Yesterday (Saturday) they attacked Jaysh al-Islam and killed 12 of its fighters."
A spokesman for the Islamist group said rebels also killed an unknown number of the enemy.
The Observatory was not in a position to confirm tolls, but said loyalists were backed by Lebanese Shiite Hezbollah fighters on the ground, as well as by regime artillery.
Syria's war began in March 2011 as a peaceful movement demanding democratic change but later morphed into a brutal civil war, after Assad's regime unleashed a crackdown on dissent.