The UN refugee agency said the situation on the Libya-Tunisia border was reaching crisis point as desperate expatriate workers pour across, fearful of a bloody rearguard action by diehard regime elements.
More than 100,000 people have already left Libya to escape a vicious crackdown by Kadhafi loyalists which has left at least 1,000 dead, according to conservative UN estimates.
|A rebel Libyan soldier holds a rocket-propelled grenade launcher as he stands on the roof of a barracks in Benghazi.|
Anger at authoritarian Arab regimes in the Middle East and North Africa raged from Algeria to Yemen and has spread to the previously unaffected Gulf states of Kuwait and Oman, unnerving financial markets around the world.
New York crude prices again breached $100 a barrel in early Asian trade Wednesday and Wall Street shares slumped, after Federal Reserve chief Ben Bernanke warned that high oil prices could spark inflation and hamper recovery.
Huge crowds poured into the centre of Yemen's capital Sanaa on Tuesday to protest at President Ali Abdullah, in power since 1978.
Saleh dismissed the demonstrations across the Middle East as "a storm orchestrated from Tel Aviv and under Washington's supervision".
Diplomatic manoeuvring on Libya stepped up with the United Nations on Tuesday suspending the oil-rich state from its main human rights body, but the UN Security Council is split on the crisis.
Kadhafi is shouting defiance, although his regime now controls only some western areas around the capital and a few longtime bastions in the arid south. Key oil fields in the east have fallen to the opposition.
US Secretary of State Hillary Clinton said Libya was at a crossroads between progress to a "peaceful democracy" or "protracted civil war".
British Prime Minister David Cameron, a leading advocate of the no-fly option, said it was unacceptable for Kadhafi to "be murdering his own people, using aeroplanes and helicopter gunships and the like".
London said a no-fly zone did not necessarily require UN approval, but new French Foreign Minister Alain Juppe ruled out military action without a clear UN mandate, and Russia appears sceptical.
NATO intervention in Libya might be "extremely counter-productive" in the eyes of Arab public opinion, Juppe said, while top US military officials stressed the lack of international unanimity and the logistical problems.
Although Kadhafi's military is badly outgunned by US and NATO aircraft, the regime has dozens of surface-to-air missiles that could target invading warplanes.
"We also have to think about frankly the use of the US military in another country in the Middle East," US Defence Secretary Robert Gates said.
Rebels in Benghazi said they had formed a military council in the eastern Libyan city, the hotbed of the uprising against Kadhafi's four-decade iron rule.
The council will liaise with similar groups in other eastern cities, the rebels said, but it was not immediately clear if there were plans for a regional command.
Salwa Bughaighi, a member of the coalition trying to run Benghazi, said they would seek a no-fly zone to prevent Kadhafi from reinforcing his strongholds in Tripoli and Sirte.
Other people privy to rebel discussions in Benghazi said they were losing hope that the popular uprising could topple Kadhafi and were inclined to ask for foreign air strikes, perhaps under a UN mandate, on strategic targets.
The no-fly option received backing from the exiled crown prince of Libya, Mohammed el-Senussi, who said military action should go no further than that.
"Let me be clear. There is a difference between a no-fly zone and military intervention, and the Libyan people do not seek external military involvement on the ground," he said in London.
"That will not bring about the peace and freedom that we crave."
As local councils wrestled with how to get public services running again, many protesters fear their disorganised forces will be outgunned by Kadhafi's militias if they try to strike out to the west from their stronghold in the east.
Overnight, pro-Kadhafi militiamen were repulsed after attempting to retake Zawiyah, a middle-class dormitory town just 60 kilometres (40 miles) west of Tripoli where several of the leader's lieutenants have homes, residents said.
But troops loyal to Kadhafi at the Wazin border post near Tunisia, which had been deserted by the police and military since Sunday, were reinforced on Tuesday, witnesses said.
And rebels in Zintan, 145 kilometres (70 miles) southwest of Tripoli, were bracing for an assault by Kadhafi forces to retake the city, the first in western Libya to throw off his rule.
General Sultan Yehia, in charge of a group of men with mismatched uniforms in Ajdabiya, the westernmost town fully controlled by opposition forces, said finishing off Kadhafi's forces was not an option.
"We are preparing ourselves to defend but not to go on the attack," said the moustachioed old soldier, who finds himself on the frontline of an anti-regime movement that has spread far and wide through the Arab world