Even as Libya's embattled leader Muammar Gaddafi scoffed at growing demands to step down amid worsening violence in the country, reports have emerged that armed forces loyal to him are gathering around the city of Nalut on the border with Tunisia.

ABC News has reported, quoting diplomats, that thousands of people have died in the western border with Tunisia in the two weeks since violent protests erupted.

Reports say many cities along the west of the country are being besieged as forces loyal to Gaddafi are trying to retake control of them.

Quoting eye witnesses, Reuters has reported that Gaddafi's forces surrounded the area near the Tunisian border, armed with heavy machine guns mounted on four-wheel drive vehicles.

In the city of Benghazi, which was among the first places to witness anti-government protests, the opposition has set up its own interim government, according to AFP report.

Further west in Misrata, opposition groups told Reuters they had repelled a government counter-offensive and in Zawia, west of Tripoli, opposition groups say they remain surrounded by army forces loyal to Mr Gaddafi and anticipate an attempt to re-take that town, ABC News said.

Reuters has reported that the opposition forces have taken control of oil facilities in the eastern parts of the country.

While Gaddafi tried to hold on to power, showing off vestigial support for his regime in the capital Tripoli reports have confirmed that he has lost grip on much of the rest of the country. The United States and European leaders have mounted pressure on Gaddafi to step down to prevent a civil war, but the 68-year-old ruler dug his foot in.

In Tripoli, people queued up in front of state banks to collect $400 the regime is distributing to every family, in an effort to shore up support.

The concerted pressure on the regime rose on Tuesday as the U.S. reportedly moved its naval and air forces closer to Libya. The UN Security Council imposed sanctions on the country over the weekend.

The United States, whose Sixth Fleet operates out of Italy, said it was moving naval and air forces closer to Libya and working on contingency plans, including humanitarian assistance. Analysts said military action against Gaddafi was unlikely, Reuters reported.