Iraqi and U.S. military officials vowed to expand the offensive.
The 8,500-strong Iraqi-U.S. force continued house-to-house searches, and military leaders said the assault would push all along the Syrian frontier and in the Euphrates River valley.
Cities and towns along the fabled river are bastions of the insurgency, a collection of foreign fighters and disaffected Sunni Muslims, many of them Saddam Hussein loyalists.
About 5,000 Iraqi soldiers, backed by a 3,500-strong American armored force, reported 156 insurgents killed and 246 captured. The force discovered a big bomb factory, 18 weapons caches and the tunnel network in the ancient Sarai neighborhood of Tal Afar, 60 miles east of the Syrian border.
"The terrorists had seen it coming (and prepared) tunnel complexes to be used as escape routes," Maj. Gen. Rick Lynch said in Baghdad.
Lynch said operations in Tal Afar were part of a much larger, nationwide plan to destroy insurgent and al Qaeda bases, which included ongoing operations in Mosul, Qaim and the western town of Rutba.
A group claiming to be an offshoot of al Qaeda said it would retaliate against the government and security forces in the capital.
"The Taifa al-Mansoura Army has decided to ... strike at strategic and other targets of importance for the occupation and the infidels in Baghdad by using chemical and unconventional weapons developed by the mujahedeen, unless the military operations in Tal Afar stop within 24 hours," the statement said.
It was not immediately possible to determine the authenticity of the statement, which was posted on a Web site known for its militant contents.
Iraqi Defense Minister Sadoun al-Dulaimi said the sweep of Tal Afar was carried out at the request of city residents and would be a model as his forces attacked other insurgent-held cities in quick succession.
"After the Tal Afar operation ends, we will move on Rabiyah (on the Syrian border) and Sinjar (a region north of nearby Mosul) and then go down to the Euphrates valley," al-Dulaimi said.
"We are warning those who have given shelter to terrorists that they must stop, kick them out or else we will cut off their hands, heads and tongues as we did in Tal Afar," al-Dulaimi said, apparently using figurative language.
In the Tal Afar sweep, Al-Dulaimi said five government soldiers were killed and three wound in what was the biggest military operation in Iraq for months.
In other developments:
The offensive in Tal Afar is especially delicate because of the tangle of ethnic sensitivities in the region.
About 90 percent of the city's population, most of which fled to the countryside before the fighting began, is Sunni Turkmen who have complained about their treatment from the Shiite-dominated government and police force put in place after the U.S. invasion in 2003.
Addressing that complaint, Interior Minister Bayan Jabr announced Saturday that 1,000 additional police officers would be hired in Tal Afar after the offensive and that they would be chosen from the Turkmen population.
The Turkmen have a vocal ally in their Turkish brethren to the north, where Turkey's government is a vital U.S. ally and has fought against its own Kurdish insurgency for decades. Tal Afar is next to land controlled by Iraqi Kurds.
Turkey voiced disapproval of U.S. tactics when American forces ran insurgents out of Tal Afar a year ago. The Turkmen residents complained that Iraqi Kurds were fighting alongside the Americans.
U.S. and Kurdish officials denied the allegation, but the Turkish government threatened to stop cooperating with the Americans. The siege was lifted the next day and insurgents began returning when the Americans quickly pulled out, leaving behind only a skeleton force of 500 soldiers.
For those reasons, U.S. forces have stood back during the new sweep through Tal Afar, allowing Iraqi forces to break down doors in the search for insurgents.