The Islamic State (IS) group captured Qaraqosh in Nineveh province overnight after the withdrawal of Kurdish forces.
Meanwhile, the UN says some of the 50,000 members of the Yazidi religious minority trapped by IS on Mount Sinjar have been rescued.
IS controls parts of Iraq and Syria and says it has created an Islamic state.
Nineveh, located 250 miles north-west of Baghdad, is home to a large number of religious minorities.
Tens of thousands have been forced to flee since the Islamist rebels launched their onslaught in the north in June.
A majority of Nineveh inhabitants left their homes overnight, according to Fraternite en Irak, an international Christian organization based in Paris.
As many as 100,000 people are believed to be fleeing toward the autonomous Kurdistan Region.
Kurdish forces, known as the Peshmerga, have been fighting the IS militants’ advance for weeks.
The Peshmerga’s commander in Qaraqosh reportedly told the town’s archbishop late on Wednesday that the forces were abandoning their posts.
Several senior clergymen in Nineveh confirmed the town had fallen.
“It’s a catastrophe, a tragic situation: tens of thousands of terrified people are being displaced as we speak,” said Joseph Thomas, the Chaldean archbishop of the northern city of Kirkuk.
Eyewitnesses in Qaraqosh said IS militants were taking down crosses in churches and burning religious manuscripts.
The town – referred to as Iraq’s Christian capital – is located 20 miles south-east of the city of Mosul, which was captured by IS in June.
Last month, hundreds of Christian families fled Mosul after the Islamist rebels gave them an ultimatum to convert to Islam or face death.
Iraq is home to one of the world’s most ancient Christian communities, but numbers have dwindled amid growing sectarian violence since the US-led invasion in 2003.
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