Terrorist leaders rounded up fighters and then set them alight in town square.

Residents claim the terrorists were set alight in the town's main square in a terrifying message to other militants who may be forced to defend Mosul from an attack.

The fighters had been driven out of Ramadi, the capital of Anbar province, two weeks ago in a major setback for their aims of creating a caliphate across Iraq and Syria.

'They were grouped together and made to stand in a circle. And set on fire to die,' a former Iraqi resident now living in the U.S. but remains in contact with family in the town told Fox News.

Other Iraqis with relatives in Mosul said defeated ISIS militants were being punished for not martyring themselves in battle.

Michael Pregent, a terrorism expert and former intelligence adviser to General David Petraeus in Iraq, said: 'There is no surprise on executing ISIS fighters from Ramadi.'

He said the terror group exacted the same punishments to fighters who lost Saddam Hussein's hometown of Tikrit last year.

The terrorists were also murdering women and children accused of being spies as the terror group's grip on the town becomes increasingly fragile.

Mr Pregent said: 'ISIS is fracturing, paranoid from within. They are using women and children executions to intimidate – the harsher the tactic the more desperate the leadership is.'

It came as the U.S. military said its aircraft bombed an ISIS cash distribution site in the town as parts of coalition efforts to disrupt the group's financial activities.

CNN, citing unnamed U.S. defense officials, said the building in Mosul was destroyed by two 2,000lb bombs.

The officials could not say exactly how much money was there or in what currency, but one described it as 'millions'.

As many as 3,200 ISIS fighters are based in the town, more than three times the number that held Ramadi, according to the coalition.

Officials said efforts to rebuild Ramadi were being hampered by boobytraps in streets and buildings.

Ramadi, the capital of Anbar province, was touted as the first major success for Iraq's army since it collapsed in the face of ISIS's lightning advance across the country's north and west 18 months ago, Daily Mail reported.

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