Deir Hafer lies on a key road linking Aleppo city to the IS-controlled town of Khafsah, which holds the main station to pump water into Aleppo, and further east to the jihadist group's de facto capital Raqa.
Residents of Aleppo city have been without mains water for 48 days after the jihadists cut the supply.
On Sunday, Russian and regime warplanes bombarded IS positions in support of Syrian troops, which had advanced to 11 kilometres from Khafsah, the Observatory said.
The Observatory said the suicide attack in the town "killed seven fighters and wounded several others, some of them in critical condition".
In January, a massive tanker truck bomb ripped through a market in Azaz, killing 48 people and wounding dozens, the Observatory said.
It was suspected that IS was behind that attack. Syria's conflict broke out in March 2011 with protests against President Bashar al-Assad, but has morphed into a complex conflict that has killed more than 310,000 people. Air strikes on the northwestern province of Idlib on Sunday killed six people, including five members of the same family, the Observatory said.
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