Libya's ramshackle government lost control of a former stronghold of Muammar Gaddafi on Tuesday after local people staged an armed uprising, posing the gravest challenge yet to the country's new rulers.

A bullet-scarred barracks, scorched and abandoned like the ageing tanks guarding its shattered gateway, was all that remained yesterday of what passed for the Libyan government's grip on Bani Walid.

But a day after townsmen put to flight a force loyal to the Western-backed interim administration in Tripoli, elders in the desert city, once a bastion of support for Muammar Gaddafi, dismissed accusations they wanted to restore the late dictator's family to power or had any ambitions beyond their local area.

"Allegations of pro-Gaddafi elements in Bani Walid, this is not true," said Miftah Jubarra, who was among dozens of leading citizens gathered at a local mosque to form a municipal council now that nominal representatives from the capital have fled.

"In the Libyan revolution, we have all become brothers," Jubarra told Reuters. "We will not be an obstacle to progress."

That might reassure the National Transitional Council, the body which won Nato backing to oust Gaddafi last year but which is now struggling to restore services and impose order on myriad armed groups. An official of the NTC's government in Tripoli insisted it saw no threat from the "limited local incident."

Yet the violence, 150 km south of the capital, was also symptomatic of major obstacles to Libyan hopes of a rapid transition to peace, democracy and oil-fueled prosperity.

Residents heard warplanes overhead late on Monday as NTC forces hastily drove south from Tripoli to take up positions 50 km from Bani Walid. But those troops had, as yet, no orders to move on the town, where Gaddafi loyalists fought rebel forces to a standstill before negotiating a surrender in October.

Interior Minister Fawzi Abd al-All told a news conference in Tripoli would "strike with an iron fist" anyone who posed a threat to Libyan security - but he also said there would be no NTC move against Bani Walid until it was clear what happened.

People in Bani Walid urged the NTC to keep back and the government official in Tripoli, speaking on condition of anonymity, told Reuters that the interim administration was in no hurry to get mired in a dispute he characterized as a spat between local factions, rather than a counter-revolution.

Though pro-government militiamen who fled on Monday spoke of their barracks being overrun by fighters flying the green flag of the old regime, Reuters journalists who toured the town of 75,000 on Tuesday saw little overt sign of such allegiances to Gaddafi, whose now captive son Saif al-Islam staged a last stand in Bani Walid before fleeing into the Sahara three months ago.

Rather than green flags, the most common banners flying were the red, green and black tricolor of the NTC.

Some graffiti spoke of lingering nostalgia for the Gaddafis in a town whose dominant Warfalla tribe fared well under him.

But those willing to talk to reporters insisted the violence was no revanchist putsch but was provoked by local abuses allegedly committed by The May 28th Brigade, a militia loyal to the NTC.

"When men from Tripoli come into your house and harass women, what are we to do?" said Fati Hassan, a 28-year-old Bani Walid resident who described the men of May 28th as a mixture of local men and outsiders, former anti-Gaddafi rebels who had turned into oppressors when given control over the town.

"They were arresting people from the first day after liberation. People are still missing. I am a revolutionary and I have friends in The May 28th Brigade," said Hassan, who said he urged them to ease off. "The war is over now."

A sleep-deprived doctor at the poorly supplied local hospital in Bani Walid, as well as other residents of the town, said at least seven people were killed on Monday when tempers boiled over, and an eighth died of wounds on Tuesday.

It was unclear if this figure included four militiamen whose comrades in the NTC brigade said were killed.

Jubarra, who sat at the meeting of elders, gave details of the incident which, he said, caused patience to snap among the people of the town.

"On Friday, the May 28th Brigade arrested a man from Bani Walid. After Bani Walid residents lodged a protest, he was finally released. But he had been tortured.

"This caused an argument that escalated to arms.

"Bani Walid fighters took over the 28th May camp, confiscated weapons and pushed them out of the city," Jubarra explained to the elders, who sat in silence around him, many of them wrapped in traditional white woolen blankets.

At the barracks once used by Gaddafi's army, which had been their headquarters, spent cartridge cases crunched under foot, testifying to an intense gunfight. A meter-wide hole in the perimeter wall showed where a rocket had blasted through. Local people said the two sides exchanged fire with anti-tank weapons.

Clearly conscious of the risk that the NTC, keen to assert an authority that has been ebbing in recent weeks as memories fade of the victory over dictatorship, local people were anxious to send a message to Tripoli not to hit back:

"We are asking the NTC not to escalate this issue by sending troops," Jubarra said, turning his gaze from the assembled town elders to address Reuters journalists directly.

Another of those gathered at the mosque to form a local government, Ali Zargoun, said they would reject any attempt by NTC chairman Mustafa Abdel Jalil, Libya's de facto head of state, to impose an authority on them: "If Abdel Jalil is going to force anyone on us, we won't accept that by any means."

Abdel Jalil was already having a bad week and has warned Libyans of a "bottomless pit" if trouble goes on in a country awash with guns. His deputy quit, bemoaning an "atmosphere of hatred" after being roughed up by disgruntled citizens.

And Abdel Jalil found himself besieged in his office by protesters in Benghazi, the seat of the revolt. They were complaining about delays in providing services for people in a country impatient to see its oil riches shared out more widely.

There is also growing dismay at progress toward an election due in June, with details still unclear on how the vote will be conducted and complaints of a lack of transparency from a body that includes many who held important positions under Gaddafi.

While Bani Walid was and remains a particular headache for the NTC, it is not alone. Towns and cities across the country are being run with little reference to central authority and in a number of areas old scores and local frictions are being fought over by groups that were nominally allies in the revolt.

"The civil war has produced new conflicts that are far from settled and that have yet to play out, namely power struggles at the local level, and conflicts between local centers of power for influence at the national level," said Wolfram Lacher of the German Institute for International and Security Affairs who has been in the country researching post-Gaddafi Libya.

"Most of these are unlikely to develop into violent conflicts as in Bani Walid," Lacher said from Berlin. "But they will be playing out across the country in the coming months."

The government official acknowledged the difficulties. Speaking to Reuters on condition of anonymity, he said: "As we all know, some regions are fragile in view of the vastness of the country and the presence of huge quantities of arms."

Among the issues being disputed is determining who will replace those who held power under Gaddafi, and who might be punished or otherwise held accountable for past abuses.

Many Libya watchers urge caution, however, in branding any of those competing groups as "Gaddafi loyalists," and few see any real threat of the late leader's exiled sons, or Saif al-Islam who is being held captive by pro-NTC fighters in the town of Zintan, becoming a focus for a fight back by the old guard.

Rather, the label "pro-Gaddafi" has tended to be applied to adversaries by groups keen to undermine their rivals' cause:

"We should be cautious regarding reports of Gaddafi loyalists," Libya expert Lacher said. "This may be one local party to the conflict trying to get other forces to intervene by painting its adversaries as pro-Gaddafi," he added.-Reuters