Toungoo mattered because of geography. Whoever held the city controlled the road north toward Mandalay and the bridge over the Sittang River that carried traffic east into the highlands. If the Japanese took both, they could swing around the entire Allied defensive line in Burma and race to Lashio, severing China's lifeline. Major-General Dai Anlan understood this. He chose to make his stand not on the surrounding flatlands, which offered little cover, but inside the old city itself, where a well-preserved fortified wall and ditch dating from earlier centuries provided a ready-made defensive perimeter. His engineers reinforced these ancient works with concealed timber positions, turning Toungoo's old quarter into a fortress. To buy time, he pushed a cavalry screen 35 miles south to the Kan River, where a platoon of cyclists took up position near the bridge at Nyaungchidauk.

The first shots came on March 18 when Japanese scouts from the 55th Division clashed with Dai Anlan's cavalry at the Kan River. Over three days, the Chinese screen fell back in good order, trading space for time while the main defenses at Toungoo were completed. Then, on March 24, the Japanese made a flanking move that changed the shape of the battle. While one regiment attacked the Chinese outpost at Oktwin from the front, the 143rd Regiment slipped through the jungle to the west and seized Toungoo's airfield and a railway station to the north, cutting the 200th Division off from reinforcement on three sides. Only the Sittang River crossing to the east remained open. Dai Anlan pulled his outlying troops back inside the city walls, assigned each of his three regiments a sector, and moved his headquarters across the river to keep his last supply line alive.

At eight in the morning on March 25, the Japanese struck from three directions at once. The fighting was intimate and savage. When Japanese troops infiltrated the northwestern corner of the citadel that night, the Chinese counterattacked in the dark, and the two sides became so entangled in house-to-house combat that Japanese aircraft and artillery could not fire without hitting their own men. By March 26, a railway line running through the city had become the front line, with Chinese and Japanese soldiers facing each other across less than a hundred meters of open ground. The Japanese pulled back 200 meters to allow their bombers room to work, but the Chinese had learned to hide in their camouflaged positions during bombardments, then open fire with machine guns and grenades when the Japanese infantry closed to within 40 or 50 meters. This grim rhythm repeated itself for days. Casualties mounted on both sides, and the arrival of the Chinese New 22nd Division to the north forced the Japanese to peel off a blocking battalion, thinning their already overstretched attack.

By March 27, the Japanese had turned to tear gas and incendiary bombardment. The Chinese held. On March 28, the 3rd Heavy Field Artillery Regiment arrived with 15-centimeter howitzers and pounded the defenders' positions while bombers struck from above, though heavy fog delayed the air attacks until mid-afternoon. Still the 200th Division clung to its fortified blocks. That same day, a fast-moving column from the Japanese 56th Division, some 404 men in 45 trucks with six armored cars, raced north from Rangoon. By evening, they had forded the Sittang south of the city where the water was only chest-deep, leaving their vehicles behind and striking at the Chinese rear. Dai Anlan organized the defense personally, committing his last reserves to protect divisional headquarters on the east bank. If these troops broke through, the entire 200th Division would be trapped inside a burning city with no way out.

On the afternoon of March 29, with the city on fire and enemy forces closing from the east, orders came to withdraw. What Dai Anlan executed that night was a masterpiece of discipline under pressure. Each battalion left behind a rearguard that launched aggressive night attacks, convincing the Japanese that the defense was still holding firm. The 599th Regiment crossed the battered Sittang bridge first, followed by the 600th; the 598th forded the river. By four in the morning on March 30, the entire division had slipped out of Toungoo with all its wounded. When the Japanese attacked at dawn, they encountered fierce resistance from rearguards and did not realize the main force had gone. It took until nearly nine o'clock for engineers to blast through the remaining Chinese strongpoints and link up with troops that had seized the Sittang bridge at seven. Toungoo was in Japanese hands, and the road east lay open. But the 200th Division had survived intact, rejoining the New 22nd Division at Yedashe to continue blocking the Sittang River valley. The battle cost both sides dearly, yet the Chinese soldiers who fought at Toungoo demonstrated that determined infantry, well dug in and led by a commander willing to share their danger, could hold far longer than anyone expected.