Fighting raged on the front line between rebel-held eastern Libya and the loyalist-held west on Saturday as rebels claimed to have captured the strategic oil town of Brega, an AFP journalist reported.
Although there was no immediate confirmation of the claim, a correspondent at the scene witnesed seven bodies of pro-Kadhafi fighters and at least 10 burnt-out pick-up trucks along the road between Ajbadiya and Brega, 80 kilometres (50 miles) to the west.
Fighting appeared to have subsided on Saturday morning on the outskirts of the town and only the sound of NATO fighters flying overhead disturbed the calm.
Brega, 800 kilometres (500 miles) east of Tripoli, has been the scene of intense exchanges over the past few days when pro-Kadhafi forces returned after being driven out by the rebels.
But it has been unclear since Thursday who actually held the town with the rebel forces regrouping in Ajdabiya, 80 kilometres (50 miles) to the east.
Overnight, fighting flared around the rebel-held city of Misrata and air strikes were reported elsewhere in the country after Kadhafi's regime rejected a rebel offer of a ceasefire.
And at the United Nations, the thorny issue of Western governments arming the rebels set alarm bells ringing.
The US military was poised to withdraw its combat jets and Tomahawk cruise missiles from the air campaign this weekend, as NATO allies take the lead in bombing Kadhafi's forces.
The move follows pledges by President Barack Obama to quickly shift command of the operation to NATO, with the US military playing a supporting role -- providing planes for mid-air refuelling, jamming and surveillance.
Coalition forces, meanwhile, strafed positions held by loyalist forces in the Al Khums and Al Rojban regions east and southwest of the capital Tripoli late Friday, according to Libyan state television.
An Al Khums resident told AFP he heard explosions coming from a local naval base, about 120 kilometres (70 miles) east of the capital, which had been bombed by coalition forces earlier.
Forces loyal to Kadhafi also attacked the third city of Misrata with tanks and rocket fire, a rebel spokesman said.
In the rebel bastion of Benghazi, Transitional National Council leader Mustafa Abdul Jalil said the opposition was ready for a truce, provided Kadhafi's forces end their assaults on rebel-held cities.
But government spokesman Mussa Ibrahim rejected the offer, saying Kadhafi's forces would not withdraw from towns they control.
"The rebels never offered peace. They don't offer peace, they are making impossible demands," Ibrahim told reporters, calling the truce offer a "trick".
"We will not leave our cities. We are the government, not them," he said, adding however that the government was always ready to negotiate and wanted peace.
Abdul Jalil's offer came two days after rebels were driven out of a string of key oil terminals in eastern Libya they had twice seized during the weeks-old revolt aimed at toppling Kadhafi's four-decade-old regime.
"We agree on a ceasefire on the condition that our brothers in the western cities have freedom of expression and that the forces besieging the cities withdraw," he told reporters after meeting UN special envoy Abdul Ilah Khatib.
He added, however, that the revolution still aimed to topple the regime.
Khatib said he had met top officials of Kadhafi's government in Tripoli on Thursday to call for a ceasefire, lifting the siege of the western cities and access for humanitarian aid.
He called for a "real ceasefire" that must be "credible, effective and verifiable".
The nations staging air strikes on Kadhafi's forces will be heading into a diplomatic minefield if they arm Libyan rebels as well, envoys to the Unired Nations said.
With international law specialists warning that any supplies would breach the UN Security Council arms embargo that the United States, Britain and France all voted for, diplomats say a council showdown would certainly follow if evidence emerges of deliveries.
US Secretary of State Hillary Clinton and British Prime Minister David Cameron have both said they believe UN resolutions on Libya allow arming the rebels.
"Many countries would certainly strongly oppose any attempt to interpret the current resolutions as permitting arms supplies," one senior diplomat on the 15-nation council responded, speaking on condition of anonymity.
The Western allies stress that no decision has been taken to arm the rebels, but experts on both sides of the divide are frantically scanning past UN resolutions and international law books.
Resolution 1970 passed on February 26 ordered the Libya arms embargo. Resolution 1973 voted by 10 nations, with five abstaining, on March 17 called on all nations to cooperate to ensure "strict implementation" of the prohibition.
Britain and America are arguing, however, that part of Resolution 1973, which allows member states "to take all necessary measures ... to protect civilians" gives the wiggle room for military assistance to the rebels.
"It is our interpretation that 1973 amended or overrode the absolute prohibition of arms to anyone in Libya so that there could be legitimate transfer of arms if a country were to choose to do that," the US secretary of state said this week.
In the face of the disagreements, no country is openly calling for arms for anti-Kadhafi fighters and NATO chief Anders Fogh Rasmussen said Thursday he opposed such a move.
"I'm not ruling it out. But I'm also not ruling it in. We're still making an assessment," US President Barack Obama said on Tuesday. Cameron gave a similar comment.
France is "prepared to discuss this with our partners," French Foreign Minister Alain Juppe said at a London conference on Libya this week. But he and Defence Minister Gerard Longuet have said such assistance is not compatible with Resolution 1973.