Heavy casualties were reported by both sides as Khartoum's forces retook Heglig ten days after Southern troops seized it, in a move that had raised concern the former civil war foes were returning to fully-fledged conflict.
"Our troops were able to liberate Heglig town by force," Sudanese Defence Minister Abdelrahim Mohammed Hussein announced on state television. "Our enemy suffered heavy losses in people and equipment."
Sudanese troops launched a renewed counter-attack late Thursday with air strikes hitting Southern troops entrenched along the frontline, with Juba announcing a withdrawal as Khartoum celebrated victory.
"An orderly withdrawal will commence immediately and shall be completed within three days," South's Information Minister Barnaba Marial Benjamin said earlier, reading out a presidential statement to reporters.
International powers have called on Juba to pull back its forces, but it had resisted those calls, insisting it would do so only after Khartoum withdrew its troops from the neighbouring contested Abyei region.
On Thursday, United Nations Chief Ban Ki-moon condemned the South's taking of Heglig as an "illegal act," but Juba still maintained Friday that Heglig -- which it calls Panthou in the local Dinka language -- was its territory.
Fighting between Sudan and South Sudan escalated earlier this month, following the South's April 10 seizure of Heglig, which makes up around half of Sudan's oil production for its faltering economy.
Sudanese President Omar al-Bashir this week called for the destruction of the "insect" Juba government, and has launched waves of air strikes against the former civil war foe.
Tensions have gradually mounted since, with the two governments unable to agree on their border -- which cuts through rich oil reserves -- sovereignty over the disputed territory of Abyei, and oil transit fees.
Meanwhile, fighters in Sudan's Blue Nile -- civil war allies of the former rebels who now rule South Sudan -- said Friday they had killed 79 government troops and militiamen in two ambushes in the ethnically divided state.
The clashes sparked widespread fears that fighting would spread. The violence was already the worst since South Sudan won independence in July after a 1983-2005 civil war in which some two million people died.