NATO has acknowledged it was responsible for civilian deaths in Tripoli after Libyan officials showed reporters five bodies, including two toddlers, they said were among nine people killed in a "barbaric" air strike.
An alliance statement in Brussels said on Sunday "NATO acknowledges civilian casualties in Tripoli strike" during action targeting a missile site.
"It appears that one weapon did not strike the intended target and that there may have been a weapons system failure which may have caused a number of civilian casualties," the statement added.
Libyan government spokesman Mussa Ibrahim earlier accused the Western alliance of "deliberately targeting civilians," insisting there were no military targets anywhere near the residential neighbourhood of Tripoli that was hit overnight.
Alliance spokesman Wing Commander Mike Bracken had earlier said NATO was looking into the matter, adding: "NATO deeply regrets any civilian loss of life during this operation and would be very sorry if the review of this incident concluded it to be a NATO weapon."
The admission that the civilian deaths were caused by NATO is an embarrassment for the alliance which has led the bombing campaign under a UN mandate to protect civilians.
However, officials from the rebel-held east of the country blamed Gaddafi for the deaths, alleging that the veteran strongman was deliberately using schools and mosques to stash arms.
"We are sorry for the loss of civilian life," said rebel spokesman Abdel Hafiz Ghoga, adding that "we hold the Gaddafi regime responsible for having placed military armaments and rocket launchers near civilian areas."
Journalists were taken to the Al-Arada district of Tripoli to see rescue teams and bystanders desperately searching for survivors among the wreckage of a two-storey block of flats after the early morning air strike.
An AFP correspondent saw two bodies pulled from the rubble.
Tripoli insisted the scene was not staged after officials showed journalists a little girl in hospital two weeks ago they said was wounded in a NATO air strike. One of the medical staff said she had been in a traffic accident.
The alliance has acknowledged mis-hits in the past, mostly involving rebel fighters wrongly identified as loyalist troops.
On Saturday, NATO acknowledged that aircraft under its command had accidentally hit a rebel column near the oil refinery town of Brega on the frontline between the rebel-held east and the mainly government-held west on Thursday.
Calls are increasing for a negotiated solution to the five-month-old conflict, which has recently seen a bloody stalemate between the two sides.
On Saturday, organisations including the Arab League, the European Union and the United Nations highlighted the importance of "accelerating the launch of a political process" to end the conflict.
EU foreign policy chief Catherine Ashton attended the meeting along with outgoing Arab League chief Amr Mussa and African Union head Jean Ping, while UN chief Ban Ki-moon joined by live video link.
Ban said the roots of a negotiating process were showing but that the international community needed to give a "consistent message" on a political solution with Gaddafi.
His comments came after both Libyan Prime Minister Baghdadi al-Mahmudi and Russian envoy Mikhail Margelov insisted that contacts were under way between the two sides, despite furious rebel denials.
Rebel spokesman Ghoga said a negotiated solution had not been ruled out, but that Gaddafi and his family could not be a part of it.
Observers, including the International Crisis Group, have called on both parties to reach a deal, amid fears over a devastating and protracted conflict, as well as concerns about the Transitional National Council's capacity to govern.
The rebels said on Sunday they have not yet received any of the roughly one billion dollars promised by international donors earlier this month, and urged benefactors to make good on their promise to aid the TNC.
"(The) funds should have been deposited from last week and none have been deposited to date," Ghoga said.
The fighting continued on Sunday, with claims of nine people killed and 51 wounded as rebel and pro-Gaddafi forces tried to break a month-long military stalemate around the besieged city of Misrata.
Rebels said the dead, including fighters and civilians, were killed as the rebel-held city in western Libya came under heavy artillery fire.
Several of the wounded were said to be in critical condition.
There were also reports of heavy fighting in the town of Nalut, near the Tunisian border, but the number of casualties was not known.
