Colonel Muammar Gaddafi has promised "another Vietnam" if foreign powers answer a plea by Libyan dissidents for military intervention.
The rebels have called on the UN to strike the strongholds of foreign mercenaries, the mainly African fighters flown in to bolster Colonel Gaddafi's army, as pro-regime forces launched a dawn offensive to take back parts of the country's east.
The urgent appeal came as US President Barack Obama authorised the first official contact with the opposition leadership in Libya, according to diplomatic sources.
The President asked his officials to make the move after Human Rights Watch, the civil liberties and humanitarian lobbying organisation, asked for his help in tackling the escalating problem of refugees and deprivation in the country. The US has started to move warships towards the Libyan coast via the Suez Canal, claiming they are expected to deliver humanitarian aid but has not ruled out military intervention.
The White House said USS Ponce and USS Kearsarge were being repositioned for possible humanitarian efforts, but said the US "was not taking any options off the table".
The newly formed rebel council in Benghazi, the country's second city, which has been under the control of opposition forces for over a week now, reiterated that Colonel Gaddafi is using mercenaries from African countries to fire on his own people, and equated it to a foreign invasion. "We call for specific attacks on strongholds of these mercenaries," Hafiz Ghoga, a council spokesman, said in Benghazi. "The presence of any foreign forces on Libyan soil is strongly opposed. There is a big difference between this and strategic air strikes."
Rebel forces are facing the most critical challenge to their recent gains since they took Benghazi more than a week ago, won only after a brutal crackdown by Colonel Gaddafi's troops left hundreds dead.
In a fiery speech, the Libyan leader vowed to wage a bloody war if foreign powers dared to intervene, saying it would only plunge Libya into "another Vietnam". "We will enter a bloody war and thousands and thousands of Libyans will die if the United States enters or Nato enters," he told supporters in a two-and-a-half-hour televised speech in Tripoli.
"We are ready to hand out weapons to a million, or 2 million or 3 million, and another Vietnam will begin. It doesn't matter to us. We no longer care about anything."
His defiant words came as pro-regime forces launched a surprise offensive on the town of Brega, roughly 200km west of Benghazi, the first significant fightback by government forces since the east fell. Although loyalist troops initially captured the oil terminal and the airport, by late yesterday there were reports that they were in retreat.
As rebel fighters gathered to the east of Brega, they urged the West to intervene. "We have ammunition, live guns, Kalashnikovs, nothing big," said one rebel. "We need help."
In the past week, Nato allies have been divided over what measures to take against Libya's leadership. The US and Britain had tentatively backed a no-fly zone that would prevent Colonel Gaddafi from striking his people from the air, but such a move would first require Nato to take out Libya's air defence capabilities. France has opposed such a move, saying any military action would require UN backing.
But in a significant development, Mr Obama is understood to have asked the National Security Council in Washington to establish channels of communication with the protest movement in Benghazi, according to diplomatic sources, and has additionally requested the names of key individuals. The NSC, however, denied the claims.
Such a move would follow a decision by the French government to provide aid directly to Benghazi three days ago. It is also sending its second-largest warship to Libya to help evacuate refugees.