Boko Haram attempted to storm the city by entering through a suburb but has been met with heavy fighting by the Nigerian army.
The terrorist group, which is trying to set up an Islamic caliphate in Nigeria, has already tried to take the city in recent weeks but was unsuccessful.
Churches across Maiduguri have been immediately closed according to reports as explosions and gun fire are heard across the city.
It's believed the attack started at 3am (2am GMT) and involved rocket launchers and machine guns.
"The whole city is in fear," resident Adam Krenuwa told AFP.
"People are afraid of what will happen if Boko Haram defeats the security forces," he added.
A senior army officer told the Press Association the militants were "everywhere" and attacking from all main roads leading into the city.
The violence comes just two weeks before an election in Nigeria.
Yesterday African leaders agreed to send 7,500 troops to fight the Boko Haram insurgency, a move supported by UN Secretary General Ban Ki Moon.
Boko Haram is also responsible for the kidnapping of 276 mostly Christian school girls from a boarding school in the remote town of Chibok. 219 remain missing.
Earlier this month Bishop Oliver Dashe Dome of Maiduguri called for the Western world to send in the army to defeat Boko Haram.
He warned that drastic action was urgently needed as Boko Haram was poised to become a threat well beyond Nigeria's borders and was recruiting from Niger, Chad, Cameroon and Libya.
He said: "The West should bring in security - land forces to contain and beat back Boko Haram.
"A concerted military campaign is needed by the West to crush Boko Haram."
He added: "Among the soldiers, there were sympathisers with Boko Haram - some of them were even Boko Haram members and many of them just ran away."
The bishop described how within five years the Boko Haram threat has decimated his diocese with more than 50 churches and chapels destroyed and more than 200 churches abandoned.
He said that 1,000 of his faithful have been killed, many of them by Islamists.