Meanwhile efforts to secure a no-fly zone over the country to prevent attacks by Kadhafi's air force faltered in the United Nations Security Council.
Elsewhere in the troubled region, Bahraini police killed at least three protesters and wounded dozens Wednesday when they cleared a peaceful protest camp in the capital's Pearl Square, opposition sources said.
Firing buckshot and tear gas canisters, the police drove pro-democracy demonstrators out of Pearl Square early morning, clearing the symbolic heart of the Shiite-led uprising against the Sunni monarchy.
Benghazi was quiet after a bizarre night of celebratory gunfire triggered by a rumour that Gaddafi's Tripoli home had been bombed.
In a sign of the city's nervousness, the shooting went on till around 4:00 am on Wednesday, despite the rumour being baseless according to correspondents in the Libyan capital.
Rebel anti-aircraft batteries had opened fire at around 11:00 pm, sending tracer rounds arcing across the sky and fireworks were seen exploding overhead.
Libyans often fire weapons into the air as an expression of joy.
State television earlier quoted the army as saying it would soon move against Benghazi.
Addressing residents, it said: "The armed forces are arriving to ensure your security, undo the injustice done to you, protect you, restore calm and bring life back to normal."
"This is a humanitarian operation being undertaken in your interests, and is not aimed at taking revenge against anyone," it added.
But Gaddafi himself was less reassuring, calling the rebels "rats and stray dogs" and saying, "If this is a foreign plot, we will crush it; if it is a domestic plot, we will crush it."
"The colonialists will be vanquished, France will be vanquished, America will be vanquished, Great Britain will be vanquished," Gaddafi said on television. "The Libyan people will triumph; liberty will triumph."
"The entire Libyan people is ready to fight to protect our oil," the veteran strongman said, adding: "We are determined to preserve the unity of Libya, even at the price of our life."
He said the Arab League, which suspended Libya from participation and backed calls for a no-fly zone to prevent him from bombing rebels and civilians, was "finished".
Addressing Arab leaders, he said "it is you who should let your peoples live in freedom."
"I challenge them to give freedom to their peoples the way I have done with the Libyan people."
The pressure mounted after Kadhafi's forces attacked the key town of Ajdabiya Tuesday, inflicting heavy casualties on the outgunned and outmanoeuvred rebel fights.
Ajdabiya, straddling the roads to Benghazi, 160 kilometres (100 miles) to the north, and to Tobruk and the Egyptian border in the east, "is totally controlled and is being cleansed of armed gangs," state television said.
Rebel spokesman Khaled al-Sayeh said later that it "is still in the hands of the revolutionaries," but in Tripoli, Deputy Foreign Minister Khaled Kaaim told AFP: "I confirm that Ajdabiya is under (our) control."
"There are still some elements firing, and our forces are pursuing them," he said. "We are now beyond Ajdabiya -- our forces are heading for Benghazi."
At the United Nations a resolution on a no-fly zone and other measures sponsored by Britain, France and Lebanon, on behalf of the Arab League, was presented to the Security Council but faces stiff opposition.
Britain's envoy Mark Lyall Grant said it would be debated paragraph by paragraph on Wednesday, but diplomats said no vote was likely before Thursday.
The two-part draft resolution calls for a no-fly zone to protect civilians, as well as toughened sanctions against the Kadhafi regime, targeting new individuals and entities with an asset freeze and travel ban, diplomats said.
China and Russia are leading opposition to the no-fly zone however.
The United States is very cautious and Germany favours putting new bite into the sanctions passed by the council on February 26.
French UN ambassador Gerard Araud stressed that time was of the essence.
"We are deeply distressed by the fact that the things are worsening on the ground, that the Kadhafi forces are moving forward extremely quickly and that this council has not yet reacted," he said.
French Foreign Minister Alain Juppe earlier accused China of blocking Security Council action, while the White House defended President Barack Obama's reluctance to order US forces to mount a no-fly zone.
"I do not believe that the American people would want the US president to act unilaterally in a way to engage militarily without taking careful consideration of what the consequences of that would be," spokesman Jay Carney said.
In Bahrain hundreds of riot police backed by tanks and helicopters moved into Pearl Square shortly after dawn Wednesday, a day after King Hamad declared a three-month state of emergency in a bid to quell the protests.
The king was boosted by the arrival in the strategic island state of armed forces from Saudi Arabia and the United Arab Emirates in line with a Gulf states pact.
Troops also entered the nearby financial centre to clear it of illegal roadblocks and the handful of protesters still remaining after clashes there on Sunday injured more than 200 people.
The protesters are demanding democratic reform from the Sunni dynasty that has ruled the archipelago -- home of the US Fifth Fleet -- for more than 200 years.
Opposition Al-Wefaq movement chief Sheikh Ali Salman said the regime was acting like Kadhafi and using "extreme brutality" against ordinary people.
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