Pro-Gaddafi forces now appear to have re-taken the city of Zawiya, 50km (30 miles) from Tripoli.
The US has said any decision on a no-fly zone over Libya rests with the UN.
More than 1,000 people are believed to have died since the uprising to end Col Gaddafi's 41 years in power began in mid-February.
Belligerent mood About 212,000 people - most of them migrant workers - have fled the country, the UN estimates.
End Quote Ibrahim Rebel fighterZawiya is deserted, no animals, not even birds in the sky”
The Libyan leader also made a speech on state TV in the early hours of Wednesday morning, in which he said European governments and al-Qaeda were trying to divide the country.
He also referred to the eastern city of Benghazi, which has become the headquarters for the revolt.
"There is no choice for the people of Benghazi but to go out on the streets - men, women and children - to rid Benghazi of this betrayal," Col Gaddafi said.
"Benghazi, which used to be beautiful, is turning into ruins. It must be liberated."
The BBC's Wyre Davies, in Tripoli, says the Libyan leader appeared increasingly confident and belligerent, showing no willingness to compromise or talk to the opposition.
'Alley rats' On Wednesday morning, Libyan state TV said Zawiya had been "liberated" from the rebels.
There were reports of heavy shelling and considerable loss of life as the rebels tried to repel a huge onslaught.
One resident spoke of seeing 50 tanks and dozens of pick-up trucks loaded with pro-Gaddafi troops. The main hospital was said to have been overwhelmed with casualties.
"There are many dead people and they can't even bury them," a fighter called Ibrahim told the Reuters news agency. "Zawiya is deserted. There's nobody on the streets. No animals, not even birds in the sky," he said.
Reuters also said the refinery in Zawiya had been shut down by the fighting, quoting an official at the plant.
Diplomatic demur An official from the rebel Transitional National Council is appealing to the EU to recognise the rebels as the legitimate representatives of the Libyan people.
"This is for the sole purpose of mobilising assistance to the people inside who need just about every type of assistance," Mahmoud Jebril told the BBC.
Libyan embassy staff told Egyptian officials that he was carrying a message from Col Gaddafi, the Associated Press reported.
Calls for military intervention are growing as pro-Gaddafi forces step up their counter-offensive.
However, US Secretary of State Hillary Clinton has said that any decision to impose a no-fly zone over Libya should be made by the UN and not by Washington.
A no-fly zone would probably ban military flights by government forces through Libyan airspace. Any aircraft violating the exclusion zone would risk being shot down by international forces.
No-fly zones were imposed on southern and northern Iraq in the wake of the first Gulf war in 1991, and during the war in Bosnia in 1994-95.
The UK and France are working on a UN Security Council resolution for a no-fly zone, although Russia is opposed to the plan.
Nato defence ministers will discuss options for Libya on Thursday and Friday.