Nigeria's security services have been flooding Maiduguri, the city worst affected by the violence, the BBC's Caroline Duffield reports.
They surrounded the area housing the headquarters of Mohammed Yusuf's group, known as Boko Haram. The group is also referred to locally as the "Taliban", though it has no known links to the Afghan militants.
The group is being blamed for violent attacks on police stations, government buildings and civilians across four states in Nigeria.
It is against Western education, believes Nigeria's government is being corrupted by Western ideas and wants to see Islamic law imposed across Nigeria.
In another development, Nigerian Christian leaders said they had received no reports of Christians being targeted in the wave of Islamist violence.
"As things stand, there is no report of Christians being killed or churches being attacked, but religious leaders have called on the government to protect law-abiding citizens and religious structures," said Bishop Emmanuel Badejo, chairman of the Social Communications Commission of the Nigerian bishops' conference.
State of alert
Explosions and gunshots could be heard from the Doidamgari area of the city, where Mohammed Yusuf's home is situated and the Boko Haram have their spiritual headquarters.
By Caroline Duffield, BBC News, Nigeria
Tensions are never far from the surface in northern Nigeria. Poverty and competition for scarce resources, along with ethnic, cultural and religious differences have all fuelled sudden violence.
But the latest violence is not between communities, it involves young men from religious groups, arming themselves and attacking local police.
Fringe religious groups in Nigeria have claimed links to the Taliban before - individuals have also been accused of links to al-Qaeda. But Nigeria is very different to countries like Mali or Algeria, where groups such as al-Qaeda in the Islamic Maghreb operate.
The idea of radical Islamist militants gaining a serious foothold in Nigeria is usually dismissed, because of the strength of local identities and traditions.
President Umaru Yar'Adua ordered Nigeria's national security agencies to take all necessary action to contain and repel attacks by the extremists.
"It is the government that has moved to nip a potentially dangerous problem in the bud," he said before leaving on a visit to Brazil.
"These people have been organising, penetrating our societies, procuring arms, learning how to make explosives and bombs to disturb the peace and force abuse on the rest of Nigerians.
"And I believe the operation we have launched now will be an operation that will contain them once and for all."
The Doidamgari area is full of schools, homes, shops and a mosque, our correspondent says.
Residents and civilians have been told to leave and there are reports of armed men shooting from inside the area.
Military aircraft filled with soldiers have been seen taking off from Jos in the neighbouring Plateau state.
It is thought the troops are meant to provide support for the armoured vehicles and police already on the ground.
Outside Maiduguri, there is a heightened state of alert across the northern states:
• In the city of Kano, police arrested 53 people after an attack on a police station outside the city on Monday; police also shot and killed three suspected militants as they tried to reach Maiduguri
• In Sokoto, in the far north-west, police arrested five men said to have been caught in the act of planning an attack
• In Bauchi, scene of the first bloodshed on Sunday, 176 people remain under arrest
President Yar'Adua said 'a potentially dangerous problem' had been tackled
A BBC reporter counted about 100 bodies of residents and militants in the streets of Maiduguri on Monday.
Maiduguri police said 103 had died in the violence in the city, including 90 members of Boko Haram, eight police officers, three prison officials and two soldiers.
At least 39 people were killed in the violence in Bauchi.
Sharia law is in place across northern Nigeria, but there is no history of al-Qaeda-linked violence in the country.
The country's 150 million people are split almost equally between Muslims in the north and Christians in the south.
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