The World Bank said Tuesday it recognises the National Transitional Council as Libya's official government, after the new regime promised moderate Islamic rule and to investigate alleged war crimes.
Explaining its decision was based on "evolving events in Libya and the views of member countries," the bank pledged a major rebuilding role after seven months of an insurrection that ousted dictator Muammar Gaddafi.
The move came as the NTC sought the surrender of Gaddafi diehards who have been mounting attacks against its fighters from a few enclaves including the oasis town of Bani Walid, southeast of Tripoli.
Gaddafi, wanted for alleged crimes against humanity by the International Criminal Court, remains in hiding but many of his inner circle and one of his sons have fled to neighbouring Niger.
But the pro-NTC forces who brought down the Kadhafi regime found themselves on Tuesday also accused of committing war crimes by the London-based human rights watchdog Amnesty International.
Amnesty said in the first days of the uprising groups of protesters killed a number of captured soldiers and suspected mercenaries.
"Some were beaten to death, at least three were hanged, and others were shot dead after they had been captured or had surrendered, Amnesty said in a report.
"The NTC is facing a difficult task of reining in opposition fighters and vigilante groups responsible for serious human rights abuses, including possible war crimes but has shown unwillingness to hold them accountable," it said.
But Amnesty acknowledged the atrocities allegedly committed by the now governing opposition were of a "smaller scale" than those carried out by Gaddafi's regime, which it says may be responsible for crimes against humanity.
The NTC responded by vowing to investigate the allegations, while acknowledging "there are a small number of incidents involving those opposed to Kadhafi."
In a statement issued in its eastern bastion Benghazi, the council's executive committee said it "strongly condemns any abuses perpetrated by either side.
"The NTC is firmly committed to human rights and the rule of law, both international and local," it said.
In his first public speech since arriving in Tripoli on Saturday, Libya's interim leader Mustafa Abdel Jalil told thousands of supporters in Martyrs' Square that moderate Islam would be Libya's main source of legislation.
"We will not accept any extremist ideology, on the right or the left. We are a Muslim people, for a moderate Islam, and we will stay on this road," he said Monday night.
Earlier, Gaddafi vowed to defeat those behind the "coup" that ousted him.
"It is not possible to give Libya to the colonialists again," he said in a statement read out on Syria-based Arrai Oruba television. "All that remains for us is the struggle until victory and the defeat of the coup."
On the economic front, the International Energy Agency said Libya could recover a quarter of its oil production by the end of 2011, and two-thirds by end-2012, adding a return to full output of about 1.6 million barrels a day could take two to three years.
And Canada said it has freed up $2.2 billion dollars of Libyan assets frozen in its banks as it renewed ties with the North African country.
The World Bank's recognition of the NTC came a day after China, which had long helped prop up Kadhafi before the uprising broke out, became the last permanent member of the UN Security Council to do so.
But South African President Jacob Zuma said Tuesday the African Union still does not recognise Libya's new leaders, on the eve of a regional meeting in Pretoria on the latest developments in the conflict.
On the battlefield, fighters of Libya's new rulers brandished new weapons outside Bani Walid, where residents were fleeing fearing clashes with Gaddafi forces.
Talks were underway through mediators for the surrender of Gaddafi diehards but "so far there is no result," said Abdullah Kenshil, the NTC's chief negotiator.
"They want to continue to fight and yesterday they bombed residential areas," he said.
Kenshil, citing fleeing residents, said the humanitarian situation in Bani Walid was difficult, with shortages of water, electricity and commodities.
The NTC assault to "liberate" the desert town, 180 kilometres (110 miles) southeast of Tripoli, has been stalled for three days, following the expiry of a deadline set for Gaddafi loyalists to surrender.
The area was calm on Tuesday, save for intermittent exchanges of fire and the sound of Nato warplanes flying overhead.
On Monday, Gaddafi loyalists had also launched ferocious counterattacks on the oil refinery town of Ras Lanuf in the east and on the road towards Gaddafi's hometown of Sirte.
Nato said Tuesday its warplanes had hit a radar system, eight surface to air missile systems, five surface to air missile trailers, an armed vehicle and two air defence command vehicles.
Monday's unexpected counter-offensive by Gaddafi loyalists came despite the flight to neighbouring Niger of 32 members of his inner circle, including his son Saadi.
US State Department spokeswoman Victoria Nuland said Niger was preparing to "detain" Saadi.
Three Kadhafi generals joined the other former regime officials in a Niamey safe house, a Nigerien official said Tuesday, as a Tunisian court freed another Libyan general after dismissing charges he entered the country illegally.
Nato said meanwhile that it does not know whether Kadhafi senior is still in Libya.
"To be frank we don't know if he has left the country," Nato spokesman Colonel Roland Lavoie told reporters from the operation's headquarters in Naples, Italy.
"He has not made public appearances in the country for a while and this raises questions about his whereabouts. But we don't have sure information about where he is at this time," he said.