Europe's response in disarray as Gaddafi makes major gains

France recognises rebels as Libya's legitimate government as dictator's son threatens escalation after troops take key cities

The European Union's response to Muammar Gaddafi's onslaught against dissident forces was in disarray last night as France struck out on its own to recognise Libyan rebels as the country's legitimate government.

Foreign ministers responded with a mixture of anger and dismay after the announcement by Nicolas Sarkozy following attempts by the EU to present a united front by rubber-stamping a new package of sanctions targeting the country's financial assets.

Most EU nations appeared to distance themselves from France with the German Foreign Minister Guido Westerwelle saying that Mr Sarkozy appeared to have acted "on a whim". British sources also made it clear that they were wary of following suit. One said: "We are going to take it step by step. Our approach is that we're keen to speak to all sides and develop our contacts with opposition figures."

The confusion at a special meeting in Brussels to discuss Libya came as rebel fighters were forced to retreat from the strategic town of Ras Lanuf after a sustained artillery and air attack. The rebel forces fled alongside the the town's few remaining residents at the approach of regime troops and tanks. As he drove away in a Toyota pick-up truck, volunteer fighter Rahim Mastri, 22, said: "There was nothing to be gained by staying there, we would have been killed. They have got heavier guns and we cannot match them."

The rebel forces headed back east towards Benghazi, the capital of "Free Libya", amid growing concerns among the rebel forces that Colonel Gaddafi's forces could reverse early rebel gains during the last weeks of fighting and close in on their stronghold.

Senior officers blamed a lack of communication and organisation for the defeat. "There has been no planning, no defences set up, so Gaddafi's men could just come in," said Captain Ahmed Ibadullah, a former army officer who defected to the rebels. "We now need to regroup and see what we can do."

The advances by the regime were reinforced by its control – after bloody bombardment – of Zawiyah, the one key town west of Tripoli that had appeared within the grasp of anti-Gaddafi forces.

In Tripoli, Saif Gaddafi, the Libyan leader's son, ended an hour-long speech to a noisy and excitable youth conference with a warning to the armed "gangs" that "We are coming to you". There were jubilant chants from the crowd referring to the next rebel strongholds beyond Ras Lanuf: "Today Ajdabiya, tomorrow Benghazi."

Mr Gaddafi listed a string of atrocities which he said had been committed by the rebels in eastern Libya and ridiculed the presence of a British warship in waters outside Benghazi.

"The Libyan people are facing genocide, the annihilation of an entire population through the use of air power and heavy artillery," Hafiz Ghoga, a spokesman for the rebel leadership, told Reuters. "This does not just threaten the security of Libya but that of the whole region."

After early optimism of sweeping away the 42-year dictatorship was replaced by growing awareness that outside help was needed to replace the entrenched regime, the rebel leadership has called for a no-fly zone and airstrikes against the Gaddafi regime.

However, the European response descended into bickering last night as clear divisions emerged over plans for a no-fly zone between the partners.

The British Foreign Secretary William Hague claimed that one could be established "very, very quickly" after Britain and France had done the work at the United Nations Security Council to prepare a resolution and Nato was planning practical steps to be taken. But Germany opposed a no-fly zone. "We do not want to get sucked into a war in North Africa," said Mr Westerwelle. The US, which would play a major role in policing any no-fly zone, has been lukewarm at best about attempts to impose one.

Further divisions emerged after Mr Sarkozy shook hands with two representatives of Libya's Interim Governing Council, the Benghazi-based umbrella organisation of rebel groups, on the steps of the Elysée Palace in Paris. His Foreign Minister, Alain Juppe, was immediately rebuffed by Britain and Germany after calling for engagement with the "new" representatives of the country. "We recognise states rather than groups within states," said Mr Hague.

The EU yesterday sought to cut off the regime's cash pipeline by freezing a number of large investment funds, including the Libyan Investment Authority worth about $70bn (£43bn), which has stakes in businesses across Europe. The US has also frozen billions of dollars but, according to intelligence officials cited by The New York Times, Colonel Gaddafi still probably has access to tens of billions of cash inside the country to pay his troops and African mercenaries to ensure their loyalty as they attempt to put down the revolution in the east.

A Libyan envoy arrived in Europe this week for a series of meetings to sway EU leaders before a meeting today where they are expected to put pressure on the Gaddafi regime.

Mr Sarkozy is likely to ruffle more feathers with reported plans to urge his fellow EU leaders to take part in military action. French diplomats say that Mr Sarkozy plans to call for strikes at key targets, including a military airport in Gaddafi's hometown of Sirte.

The move would be at odds with the more cautious approach voiced by Nato yesterday where they said that the conditions for military intervention had not been met.