Rebels awaited counter-attack by Muammar Gaddafi's forces on Monday, after the Libyan leader defied calls for him to quit in the hardest-fought of the Arab world's wave of uprisings so far.

Rebels holding Zawiyah, only 50 km west of Tripoli, said about 2,000 troops loyal to Gaddafi had surrounded the city.

"We will do our best to fight them off. They will attack soon," said a former police major who switched sides and joined the rebellion. "If we are fighting for freedom, we are ready to die for it."

Residents even in parts of the capital have thrown up barricades against government forces. A general in the east of the country, where Gaddafi's power has evaporated, told Reuters his forces were ready to help rebels in the west.

"Our brothers in Tripoli say: `We are fine so far, we do not need help'. If they ask for help we are ready to move," said General Ahmed el-Gatrani, one of most senior figures in the mutinous army in Benghazi.

Analysts say they expect rebels to eventually take the capital and kill or capture Gaddafi, but add that he has the firepower to foment chaos or civil war - a prospect he and his sons have warned of.

Monday looked likely to see nervousness in oil markets. Nymex crude for April delivery was up $1.12 at $99 barrel in Globex electronic trading by 2308GMT on Sunday.

Libya only pumps 2 percent of world oil and Saudi Arabia has boosted output, but traders fear turmoil intensifying in the Arab world.

Serbian television quoted Gaddafi as blaming foreigners and al Qaeda for the unrest and condemning the U.N. Security Council for imposing sanctions and ordering a war crimes inquiry.

"The people of Libya support me. Small groups of rebels are surrounded and will be dealt with," he said. 
   European powers said it was time for Gaddafi to stand down and Secretary of State Hillary Clinton said the United States was "reaching out" to opposition groups.

Residents of Zawiyah told of fierce fighting against pro-Gaddafi paramilitaries armed with heavy weapons."Gaddafi is crazy.
His people shot at us using rocket-propelled grenades," said a man who gave his name as Mustafa. Another man called Chawki said: "We need justice. People are being killed. Gaddafi's people shot my nephew."

There were queues outside banks in Tripoli on Sunday for the 500 Libyan dinars ($400) the government had promised it would start distributing on Sunday to each family.

From Misrata, a city 200 km east of Tripoli, residents said by phone a thrust by forces loyal to Gaddafi, operating from the airport, had been rebuffed with bloodshed.

But Libyan exile groups said later aircraft were firing on the city's radio station.

In the eastern city Benghazi, opponents of the 68-year-old leader said they had formed a National Libyan Council to be the "face" of the revolution, but it was unclear who they represented.

They said they wanted no foreign intervention and had not made contact with foreign governments.