Correspondents said Gaddafi's troops were closing in on the oil refinery town of Ras Lanuf, 370 kilometres west of the rebel stronghold city of Benghazi, and pounding it with artillery fire.
Gaddafi's home town and rebel target Sirte lies a distant 230 km further west of Ras Lanuf.
On Tuesday the rebels seeking to topple Kadhafi came within 100 km of Sirte, the strongman's hometown, before encountering fierce resistance from loyalist troops.
Under barrages of artillery fire, rebel fighters stampeded from the scene, many fleeing aboard pickup trucks, reversing an advance launched when Britain, France and the United States started UN-mandated air strikes on March 19.
"We cannot fend off cannon fire with our machine guns," said rebel fighter Ramadan Berki in Bin Jawad, before he and other rebels retreated even further east to Ras Lanuf.
"We had to pull back very fast. It was very dangerous. But if the French planes came back, we would be in Sirte by this evening and in Tripoli in three days," he told AFP.
"Tell Sarkozy and Cameron that we need help, that without the air strikes, Kadhafi will massacre us again. We have only a couple of missiles but not enough," said Berki, referring to French President Nicolas Sarkozy and British Prime Minister David Cameron.
Paris has not ruled out arming the rebels and Foreign Minister Alain Juppe said at a London conference on Tuesday that France is prepared to hold discussions on the issue.
US President Barack Obama, who has laid out a moral imperative for protecting Libyan civilians caught in the battle, also said he did not rule out arming the rebels as they seek to make territorial gains.
"I'm not ruling it out. But I'm also not ruling it in. We're still making an assessment partly about what Kadhafi's forces are going to be doing," Obama said.
Obama said the "noose" was tightening around the Libyan strongman, but noted that Kadhafi did not appear to be seeking to negotiate an exit from Libya yet, despite the bombardment of his forces.
But he added he believed Kadhafi would eventually quit.
"Our expectation is that as we continue to apply steady pressure, not only militarily but also through these other means, that Kadhafi will ultimately step down," he said.
Forces in the rebel stronghold of eastern Benghazi, one of the first places to fall to the rebels at the start of the uprising now in its sixth week, said French and US diplomatic envoys were on their way to city.
A spokesman for the rebel Transitional National Council, Mustafa Ghuriani, told reporters "it would be naive to think we are not arming ourselves" to match the weaponry deployed by Kadhafi loyalists.
But he declined to confirm or deny that France and the United States were offering to supply arms, saying only that unspecified "friendly nations" were backing the rebels.
Loud explosions rocked the Libyan capital Tripoli late Tuesday close to Kadhafi's tightly guarded residence and military targets in the suburb of Tajura were also hit, an AFP correspondent reported.
The first explosion was heard around 1630 GMT, followed by a second some three minutes later in the Bab Al-Azizya district, closely followed by the whine of ambulance sirens.
Seven other explosions were also reported in Tajura, site of several military camps and an almost-nightly target of the air raids.
NATO's top commander revealed that there was no alliance representative on the ground in Libya to work with rebel forces and that he had no orders to supply the opposition with weapons.
Admiral James Stavridis also said the alliance was working to get a clearer picture of the opposition, amid intelligence reports showing "flickers" of a possible Al-Qaeda presence.
Western powers have called for Kadhafi to go, angering the eccentric leader, who issued a defiant letter likening the NATO-led strikes to the military campaigns launched by Adolf Hitler during World War II.
"Stop your barbaric, unjust offensive on Libya," he said in the letter. "Leave Libya for the Libyans. You are committing genocide against a peaceful people and a developing nation."
But opening the London talks, Cameron said the air strikes were helping to protect civilians from "murderous attacks" by Gaddafi's forces especially in the western rebel-held town of Misrata.
"Gaddafi is using snipers to shoot them down and let them bleed to death in the street," Cameron told the conference.
Tanks and troops loyal to Kadhafi stormed Misrata on Tuesday, firing shells as they attacked Libya's third city, 214 kilometres east of Tripoli, a rebel spokesman said. He warned of a "massacre" ahead.
A doctor in the city said 142 people had been killed and 1,400 wounded since March 18.
More than 40 nations and organisations gathered in London agreed to create a contact group to map out a future for Libya and to meet again as soon as possible in the Arab state of Qatar.
A rebel envoy, Mahmud Jibril, met on the sidelines of the talks with US Secretary of State Hillary Clinton, British Foreign Secretary William Hague and the French and German foreign ministers.
"A consensus has been reached, participants at the meeting unanimously said that Kadhafi must leave the country," Italian Foreign Minister Franco Frattini said.
Cameron and Clinton said the allied air strikes would go on until the Libyan leader met UN demands for a ceasefire.
And the US diplomatic chief also said that although UN sanctions prohibit the delivery of arms to the country, the ban no longer applies.
"It is our interpretation that (UN Security Council resolution) 1973 amended or overrode the absolute prohibition on arms to anyone in Libya, so that there could be a legitimate transfer of arms if a country should choose to do that," she said.
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