Prime Minister Nuri al-Maliki asked parliament to declare a state of emergency and announced the government would arm citizens to fight the jihadists and their allies.
"All of Nineveh province fell into the hands of militants," parliament speaker Osama al-Nujaifi told journalists in Baghdad, adding the gunmen were heading south towards neighbouring Salaheddin province.
An army brigadier general told AFP hundreds of militants from the Islamic State of Iraq and the Levant (ISIL) launched a major assault on the security forces late on Monday.
An interior ministry official said Mosul, the scene of deadly clashes on Friday and Saturday, was "outside the control of the state and at the mercy of the militants".
Soldiers and police had stripped off their uniforms and fled, and the militants used loudspeakers to declare they had "come to liberate" the city of some two million people.
Exodus of civilians
An AFP journalist, himself fleeing with his family, said shops were closed, a police station had been set ablaze and security forces vehicles had been burned or abandoned.
Hundreds of families were seen fleeing. Some were on foot, carrying what they could, others in vehicles with their belongings piled on the roofs.
In the Kurdish north, another AFP journalist said thousands of Mosul residents had fled for the safety of the autonomous region.
Dozens of cars and trucks queued at a Kurdish checkpoint waiting to be allowed in.
"The army forces threw away their weapons, changed their clothes, abandoned their vehicles and left the city," said fleeing Mosul resident Mahmud Nuri.
"We didn't see anyone fire a shot".
The militants seized the provincial government headquarters and the Nineveh Operations Command as well as the airport, the army general said.
They also freed hundreds of prisoners from three jails.
The Turkish consulate in Mosul said ISIL fighters had captured 28 Turkish truck drivers.
A foreign ministry official said Ankara hoped they would be released once they finished unloading fuel oil at a power station.
Maliki said the cabinet had decided to reorganise the security forces, arm citizens and to ask parliament to impose emergency rule.
It had "created a special crisis cell to follow up on the process of volunteering and equipping and arming", the premier said.
State television said parliament had received a joint request from Maliki and the president's office to declare a state of emergency.
'Threat to entire region'
Predominantly Sunni Nineveh province, of which Mosul is the capital, has long been a militant stronghold and one of Iraq's most dangerous areas.
ISIL, the most powerful militant group in Iraq, is also a key force in the rebellion against President Bashar al-Assad in neighbouring Syria.
In April, it launched a campaign in Syria's Deir Ezzor province, which borders Nineveh, aimed at carving out an Islamic state.
The group said it was behind the assault in Nineveh in messages on Twitter.
Mosul is the second city to fall from government control this year. Anti-government fighters also control Fallujah, west of Baghdad.
"ISIL is not only a threat to the stability of Iraq, but a threat to the entire region," US State Department spokesperson Jen Psaki said, adding that Washington backed "a strong coordinated response".
UN chief Ban Ki-moon was "gravely concerned by the serious deteriorating of the security situation in Mosul," his spokesperson said.
ISIL militants also took several mainly Sunni Arab areas in ethnically mixed Kirkuk province, which borders Nineveh, police Colonel Ahmed Taha said.
Taha said security forces abandoned their posts in one area, while an official said soldiers were ordered to withdraw from another, allowing militants to move in.
A similar pattern was followed in Salaheddin province where ISIL militants took control of the Siniyah and Sulaiman Bek areas after security forces pulled out, a senior army officer and a local official said.
Militants have launched major operations in Nineveh, Salaheddin, Anbar, Diyala and Baghdad provinces since Thursday, killing scores and highlighting both their long reach and the weakness of security forces.
Violence also struck other areas of Iraq on Tuesday.
In Baquba, two bombs killed 20 people near a funeral procession for a slain teacher. And in Baghdad, 11 people died in attacks.
Violence is running at its highest levels since 2006-2007, when tens of thousands were killed in clashes between Iraq's Shiite majority and Sunni Arab minority. AFP
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