Pro-Gaddafi forces have launched a fierce attack on Libyan rebels in Zawiya, sources in the town say.
Casualties were reported as 50 tanks and 120 pick-up trucks launched three attacks on the rebel-held town 50km (30 miles) west of the capital, Tripoli.
"I don't know how many are dead - they tore Zawiya down to ashes," a source in the town told the BBC.
Elsewhere, warplanes fired missiles on residential areas and near rebel positions in the oil port of Ras Lanuf.
Rebels say they have rejected an approach by officials offering to hold talks on an exit for the Libyan leader.
The Libyan leader had not sent anyone himself, but lawyers from Tripoli had volunteered to act as go-betweens, former Justice Minister Mustafa Abdel Jalil, who heads the rebels' Transitional National Council, told AFP.
Col Gaddafi has refused to cede power in the past, arguing that he has no official position and therefore it is impossible for him to resign.
In other developments:
- UN High Commissioner for Refugees Antonio Guterres says the situation on Tunisia's border with Libya is now under control - 110,000 people have flooded over the border since the crisis began
- UK Foreign Secretary William Hague says a no-fly zone over Libya is a practical possibility but needs broad international and legal support, adding that the UK and France were drafting a UN resolution on the issue as a "contingency"
- Libyan state TV broadcasts footage of what is says are confessions from rebels captured in Bin Jawad. The men - blindfolded and with their hands tied - say they were "persuaded" to fight; one says he went along "convinced that my action will destroy me and destroy Libya"
- US President Barack Obama and British Prime Minister David Cameron agree in a phone call the "common objective in Libya" must be an end to violence and the departure of Muammar Gaddafi from power
- Nato says it has stepped up aerial surveillance of Libya, with radar planes carrying out 24-hour patrols
Col Gaddafi's side believe they are making significant military gains, consolidating their hold on western Libya, says the BBC's Wyre Davies in Tripoli.
Yousef Shakir, an adviser to the Libyan cabinet, said: "The Libyan Army has, for the first time, taken a decision to cleanse the Libyan cities from rebels," he told the BBC. "The Army has already started in Libyan western cities and will move to Benghazi."
In western Libya, Zawiya and the opposition-held town of Misrata are still under siege from government forces.
A source in Zawiya said bullets were flying in all directions and that women and children as young as five were among the dead.
The government denied its troops were killing civilians and insisted they were only taking up defensive positions around Zawiya. But such statements cannot be verified because independent observers are not being allowed into the town.
On Monday, pro-Gaddafi forces had retaken the town of Bin Jawad, on the road to Ras Lanuf, which the rebels captured late last week.
On Tuesday, using air strikes, helicopter gunships and heavy armaments, they pushed back a rebel advance along the north coast, and more accurate attacks than had been seen previously seemed aimed at dislodging opposition fighters from a crossroads outside Ras Lanuf.
Under these circumstances, it is difficult to see how the Gaddafi regime would be in any mood to compromise or talk about succession, our correspondent says.
A Libyan foreign ministry official described as "absolute nonsense" reports that Col Gaddafi had offered to stand down, Reuters reports.
The rebels believe the approaches are merely an attempt to divide the Gaddafi opponents.
There seems to be a division within the council, says the BBC's Mustafa Menhshawi in Benghazi, with some saying talks are under way between Col Gaddafi and rebel leaders to secure his departure from the country, while others deny any negotiations are being held.
Western powers are stepping up their efforts to put in place a no-fly zone over Libya.
Britain and France are drafting a UN resolution, which will be debated by Nato defence ministers on Thursday.
The Organisation of the Islamic Conference, which represents Muslim countries, has joined the calls for a no-fly zone. Gulf Arab states gave their backing to the idea, condemning the use of violence against civilians by Libyan government forces and calling for an urgent meeting of the Arab League.
An Arab League official said the group's foreign ministers would meet on Saturday in Cairo to discuss the crisis.
A no-fly zone would probably ban military flights by government forces through Libyan airspace. Any aircraft violating the exclusion zone would risk being shot down by international forces.
No-fly zones were imposed on southern and northern Iraq in the wake of the first Gulf war in 1991, and during the war in Bosnia in 1994-95.
However, our correspondent in Tripoli cautions that any foreign intervention would have to be carefully calculated, as it risks playing into Col Gaddafi's hands.
The UN says more than 1,000 people have died and 200,000 have fled the violence in Libya, which is now well into its third week.
Anti-Gaddafi rebels control most of the east of the country, centred around the city of Benghazi. However, the government has consolidated its hold on western areas and the capital, Tripoli, which is home to about a third of the population of 6.5 million.
The revolt comes in the wake of uprisings in Tunisia and Egypt, whose presidents were forced from power after mass street demonstrations.
Anti-government protests have also taken place in Bahrain, Yemen, Algeria and Jordan.