At least 10 rebels were killed by a coalition air strike on Friday, fighters at the scene said on Saturday, in an increasingly chaotic battle with Muammar Gaddafi's forces over the oil town of Brega.

With the more experienced and better organised rebel army locked in combat with Gaddafi's forces, hundreds of young, inexperienced volunteers could be seen fleeing east towards Ajdabiyah, after coming under heavy mortar and machinegun fire.

A Reuters correspondent at the scene of the air strike saw the burnt out husks of at least four vehicles including an ambulance by the side of the road near the eastern entrance to the town. Men prayed at freshly dug graves covered by the rebel red, black and green flag nearby.

'Some of Gaddafi's forces sneaked in among the rebels and fired anti-aircraft guns in the air,' said rebel fighter Mustafa Ali Omar. 'After that the NATO forces came and bombed them.”

Rebel fighters at the scene said as many as 14 people may have died in the bombing, which they said happened around 10 p.m. local time (2000 GMT) on Friday.

Officials from Britain and France, which led a drive for military intervention in Libya, had no immediate comment.

Most rebels blamed a Gaddafi agent for deliberately drawing the friendly fire but some said other rebels had shot into the air by accident.

'The rebels shot up in the air and the alliance came and bombed them. We are the ones who made the mistake,' said one fighter who did not give his name.

Another, Mohammed Abdallah, said the rebels still needed air strikes to face Gaddafi's better armed forces. Pointing to his assault rifle, he said: 'We cannot fight him with just these.'

Gaddafi's forces fired rockets on Brega overnight and fighting continued further west around the town's university early on Saturday, rebels said.

But at the eastern gate of the town, dust rose from the road as young volunteers streamed away in cars after coming under heavy fire from Gaddafi's forces.

The young volunteers have frequently fled under fire, raising questions about whether the rebels will be able to make any headway against Gaddafi's better-equipped and better-trained forces without great western military involvement.

Ceasefire rejected

On Friday, a rebel leader, speaking after talks with a U.N. envoy in the eastern rebel stronghold Benghazi, offered a truce on condition that Gaddafi left Libya and his forces quit cities now under government control.

The Libyan government dismissed the ceasefire call.

'They are asking us to withdraw from our own cities .... If this is not mad then I don't know what this is. We will not leave our cities,' government spokesman Mussa Ibrahim told reporters.

Brega is one of a string of oil towns along the coast that have been taken and retaken by each side in recent weeks after a U.N. mandated intervention which was intended to protect civilians in Libya.

Rebels have been trying to marshal their ragtag units into a more disciplined force after a rebel advance along about 200 km (125 miles) of coast west from Brega was repulsed and turned into a rapid retreat this week.

Two weeks ago, Gaddafi's forces were at the gates of Benghazi and the Libyan leader pledged 'No mercy, no pity' for rebels who would be flushed out 'house by house, room by room'.

While Western action has failed to bring any end to fighting or a quick collapse of Gaddafi's administration, there have been reports of contacts between Tripoli and Western capitals.

Foreign minister Moussa Koussa defected in London this week and a Gaddafi appointee declined to take up his post as UN ambassador, condemning the 'spilling of blood' in Libya. Other reports of defections are unconfirmed.

A British government source said Mohammed Ismail, an aide to Gaddafi's son Saif al-Islam, had visited family members in London, and  Britain had 'taken the opportunity to send some very strong messages about the Gaddafi regime'. – Reuters