AJDABIYAH, Libya (Reuters) - Muammar Gaddafi's forces seized a strategic town in eastern Libya on Tuesday, opening the way to the rebel stronghold of Benghazi while world powers failed to agree to push for a no-fly zone.
The small town of Ajdabiyah was all that stood between the relentless eastward advance of Libyan government troops and the second city of Benghazi and lies on a road junction from where Gaddafi's forces could attempt to encircle the rebel stronghold.
"The town of Ajdabiyah has been cleansed of mercenaries and terrorists linked to the al Qaeda organization," state television said, referring to the rebels fighting to end Gaddafi's 41 years of absolute power.
As his survival looks more likely, foreign powers face hard decisions over whether to isolate him or seek some form of rapprochement. They are united in condemning his bloody crackdown, but show little appetite or consensus for action to support an uprising inspired by the ouster of Egypt and Tunisia's presidents.
The international community has been discussing a no-fly zone for three weeks, while rebels have faced daily attacks from Gaddafi's war planes.
Government jets opened up with rocket fire on a rebel checkpoint at the western entrance to Ajdabiyah, then unleashed a rolling artillery barrage on the town and a nearby arms dump, following the same pattern of attack that has pushed back rebels more than 100 miles in a week-long counter-offensive.
At least one missile hit a residential area. Residents and rebels piled into cars and pickups to flee town on highways toward Benghazi or Tobruk, which are still in rebel hands.
"The battle is lost. Gaddafi is throwing everything against us," said a rebel officer who gave his name as General Suleiman.
As well as the coastal road to Benghazi, there is also a 400 km (250 mile) desert road straight to Tobruk, near the Egyptian border, that would cut off Benghazi. But it was not clear whether Gaddafi's forces were strong enough to open a second front and if they could operate with such long supply lines.
Libyan League for Human Rights chief Soliman Bouchuiguir, said in Geneva if Gaddafi attacked Benghazi, a city with 670,000 people and the rebels' provisional National Council, there would be "a real bloodbath, a massacre like we saw in Rwanda."
The mood in the city was defiant but shaky.
"About the news from Ajdabiyah, everyone admits now we don't have the weapons to take on Gaddafi. We are all afraid, to be honest," Mohamed Yasiri, unemployed and 55, said.
Haitham Imami, 38, unemployed, listening to Yasiri, objected: "We are ready to fight him zenga, zenga (street by street). We have the weapons, even if we are left with daggers."
Gaddafi's planes, tanks and artillery have had few problems picking off lightly armed insurgents in the open desert, but have faced tougher resistance in towns that offer more cover.
The small oil town of Brega, with a population of just 4,300, 75 km (50 miles) southwest of Ajdabiyah, changed hands several times in three days of heavy fighting, but also succumbed to superior government firepower on Tuesday.
"We have lost Brega completely. We could not face Gaddafi's forces," said a rebel, who identified himself only as Nasser.
Foreign ministers from the Group of Eight countries meeting in Paris could not agree to press the U.N. Security Council to back a no-fly zone to protect Libyan cities from aerial bombing.
Instead, the G8 said Libyans have a right to democracy and warned Gaddafi he faced "dire consequences" if he ignored his people's rights. The G8 urged the Security Council to increase pressure on Gaddafi, including further economic measures.
French President Nicolas Sarkozy and Britain have led calls to impose a no-fly zone. But Gaddafi dismissed the plan.
"We will fight and win. A situation of that type will only serve to unite the Libyan people," he told the Italian daily Il Giornale. Sarkozy, he said, has "a mental disorder."
In Washington, the White House said it was exploring ways to free up some of the billions of dollars of assets seized from Gaddafi's government to provide help for the rebels.
At the G8, Russia and Germany argued a no-fly zone could be counterproductive, while the United States, which is likely to have to shoulder much of the burden of policing Libyan skies, is still cautious over the idea.
British Foreign Secretary William Hague said: "There is common ground here in the G8 and while not every nation sees eye-to-eye on issues such as the no-fly zone, there is a common appetite to increase the pressure on Gaddafi."
In New York, members of the U.N. Security Council are expected to receive a draft resolution later on Tuesday calling for a no-fly zone and stepped-up sanctions against Gaddafi and his inner circle, council diplomats told Reuters.
The 15-nation body is not expected to vote on the draft on Tuesday, as most member states will need time to consult with their capitals about the no-fly zone, the diplomats said.
Veto powers Russia, China and the United States, along with Portugal, Germany and South Africa are among the members that have doubts about the idea of a no-fly zone for Libya.
TOO LITTLE, TOO LATE?
As the diplomatic debate drags on, there is now a very real possibility that by the time world powers agree on a response to the conflict, Gaddafi's forces may already have won.
NATO has set three conditions for it to enforce a no-fly zone over Libya; regional support, proof its help is needed and a Security Council resolution.
An Arab League call for a no-fly zone satisfies the first condition, but with access to most of Libya barred by Gaddafi's security forces, hard evidence that NATO intervention is needed to avert atrocities or a humanitarian disaster is scarce.
U.N. Deputy High Commissioner for Human Rights Kyung-wha Kang said Gaddafi's government had "chosen to attack civilians with massive, indiscriminate force."
Growing numbers of Libyan are now crossing into Egypt fleeing Gaddafi's advance, the U.N. refugee agency said.
"Until this week, it was almost entirely migrant workers crossing into Egypt. But on Monday nearly half of the around 2,250 people were Libyans, including many families with children," said UNHCR spokeswoman Sybella Wilkes. "On the Egyptian side of Libya, we haven't seen that before."
In Misrata, the last major city in western Libya still in rebel hands, residents said water had been cut off to the city of 300,000 people, 200 km (130 miles) east of Tripoli.
Pro-Gaddafi forces took control of the small town of Zuwarah, west of Tripoli, late on Monday after sending in tanks.
A resident in Zuwarah said that on Tuesday security forces were trying to round up anyone suspected of links to the rebels.
"They have lists of names and are looking for the rebels. They also took a number of rebels as hostages," said the resident who did not want to be named.
(Additional reporting by Maria Golovnina and Michael Georgy in Tripoli, Tom Pfeiffer in Benghazi, Mariam Karouny in Djerba, Tunisia, Tarek Amara in Tunis, Louis Charbonneau and Patrick Worsnip at the United Nations, James Regan, Tim Hepher, Arshad Mohammed and John Irish in Paris; Writing by Louise Ireland)