Colonel Muammar Gaddafi says his people will take up arms if the international community imposes a no-fly zone, as the rebels have been calling for.
In an interview with Turkish TV, he said a no-fly zone would show the true intention was to seize Libya's oil.
Pro-Gaddafi forces now appear to have wrested most of Zawiya city, 50km (30 miles) from Tripoli, from the rebels.
The government has offered a reward for the capture of rebel leader, former Justice Minister Mustafa Abdel Jalil.
The amount offered is 500,000 Libyan dinars ($400,000; £250,000).
He has been based in the second city of Benghazi, where the revolt to end Col Gaddafi's 41 years in power began in mid-February.
Meanwhile, a major explosion has been heard near the rebel-held oil port of Ras Lanuf, which has been coming under heavy bombardment from government warplanes in recent days.
About 212,000 people - most of them migrant workers - have fled the country, the UN estimates.
Col Gaddafi said in an interview with Turkish TRT TV: "If they take such a decision [to impose a no-fly zone], it will be useful for Libya, because the Libyan people will see the truth, that what they want is to take control of Libya and to steal their oil.
"Then the Libyan people will take up arms against them."
Meanwhile, a Libyan plane carrying a senior official from the Gaddafi government has landed in Cairo.
Maj Gen Abdul-Rahman bin Ali al-Sayyid, the head of Libya's logistics and supply authority, arrived on a private jet.
Libyan embassy staff told Egyptian officials that he was carrying a message from Col Gaddafi.
The BBC's Wyre Davies, in Tripoli, says the Libyan leader appeared increasingly confident and belligerent, showing no willingness to compromise.
On Wednesday morning, Libyan state TV said Zawiya had been "liberated" from the rebels.
"Security is at about 95%. There are some rats that could be lying in some alleys and inside some flats. We are capturing them one group after the other," a Libyan Army captain said.
But the rebels are reported to be holding on in the city's main square, amid heavy shelling and considerable loss of life.
One resident spoke of seeing 50 tanks and dozens of pick-up trucks loaded with pro-Gaddafi troops. The main hospital was said to have been overwhelmed with casualties.
"There are many dead people and they can't even bury them," a fighter called Ibrahim told the Reuters news agency.
"Zawiya is deserted. There's nobody on the streets. No animals, not even birds in the sky."
Reuters also said the refinery in Zawiya had been shut down by the fighting, quoting an official at the plant.
Mahmoud Jebril, an official from the rebel Transitional National Council, appealed to the EU to recognise the rebels as the legitimate representatives of the Libyan people.
There have been mounting calls for a no-fly zone, which 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.
The US has said any decision on a no-fly zone over Libya rests with the UN, while Russia is strongly opposed to the plan.
Nato defence ministers will discuss options for Libya on Thursday and Friday.