Anti-Gaddafi fighters say they have entered the town of Bani Walid, one of the former Libyan leader's few remaining strongholds, and street battles are taking place.
The heaviest fighting for days broke out following a week of attempts at negotiating with tribal leaders, who are thought to be largely in support of the deposed dictator.
Rocket, mortar and tank fire have also been exchanged outside Sirte, Col Gaddafi's home town, according to witnesses.
Gaddafi loyalists had faced demands to surrender both towns this weekend or face attack.
A senior official from the National Transitional Council (NTC), which is forming an administration to take over leadership of the country, said: "They (anti-Gaddafi fighters) are in the north of (Bani Walid) fighting snipers, we have also entered from the east."
Abdullah Kenshil, the opposition fighters' chief negotiator, said the attack on Bani Walid, 95 miles (150km) southeast of Tripoli, was provoked by Gaddafi forces firing rockets at former rebel fighters in the area.
He said several Gaddafi loyalists and NTC fighters had been killed and wounded.
Sky's Lisa Holland, in Tripoli, said: "There's a developing humanitarian situation, no movement in or out of these places - the siege of Bani Walid and Sirte cannot continue much longer."
:: Pictures: Anti-Gaddafi Forces Close In On Bani Walid
NTC officials said fighters were also advancing toward the remote southern town of Sabha, the ancestral home of the Gaddafi, where he still commands support.
There have been suggestions that Col Gaddafi and his most prominent son, Saif al Islam, are in the area of Bani Walid.
However, other reports have suggested the leader may have attempted to escape with loyalists to Niger through the long desert border the two countries share.
Niger officials say his security chief, Mansour Daw, arrived there on Tuesday in a convoy with 12 other Libyans, but Col Gaddafi was not among them .
International policing organisation Interpol has issued its top most-wanted alert for the arrest of the colonel and Saif al Islam, and Libya's ex-chief of military intelligence.
The three are sought by the International Criminal Court for alleged crimes against humanity.
The elder Gaddafi has not been seen in public for months and went underground after anti-regime fighters swept into Tripoli on August 21.
The heaviest fighting for days broke out following a week of attempts at negotiating with tribal leaders, who are thought to be largely in support of the deposed dictator.
Rocket, mortar and tank fire have also been exchanged outside Sirte, Col Gaddafi's home town, according to witnesses.
Gaddafi loyalists had faced demands to surrender both towns this weekend or face attack.
A senior official from the National Transitional Council (NTC), which is forming an administration to take over leadership of the country, said: "They (anti-Gaddafi fighters) are in the north of (Bani Walid) fighting snipers, we have also entered from the east."
Abdullah Kenshil, the opposition fighters' chief negotiator, said the attack on Bani Walid, 95 miles (150km) southeast of Tripoli, was provoked by Gaddafi forces firing rockets at former rebel fighters in the area.
He said several Gaddafi loyalists and NTC fighters had been killed and wounded.
Sky's Lisa Holland, in Tripoli, said: "There's a developing humanitarian situation, no movement in or out of these places - the siege of Bani Walid and Sirte cannot continue much longer."
:: Pictures: Anti-Gaddafi Forces Close In On Bani Walid
NTC officials said fighters were also advancing toward the remote southern town of Sabha, the ancestral home of the Gaddafi, where he still commands support.
There have been suggestions that Col Gaddafi and his most prominent son, Saif al Islam, are in the area of Bani Walid.
However, other reports have suggested the leader may have attempted to escape with loyalists to Niger through the long desert border the two countries share.
Niger officials say his security chief, Mansour Daw, arrived there on Tuesday in a convoy with 12 other Libyans, but Col Gaddafi was not among them .
International policing organisation Interpol has issued its top most-wanted alert for the arrest of the colonel and Saif al Islam, and Libya's ex-chief of military intelligence.
The three are sought by the International Criminal Court for alleged crimes against humanity.
The elder Gaddafi has not been seen in public for months and went underground after anti-regime fighters swept into Tripoli on August 21.