Libyan rebels awaited a counter-attack by Muammar Gaddafi's forces on Monday, after the country's leader defied demands that he quit to end the bloodiest of the Arab world's wave of uprisings.

Rebels holding Zawiyah, only 50 km (30 miles) west of Tripoli, said about 2,000 troops loyal to Gaddafi had surrounded the city.

We will do our best to fight them off. They will attack soon, said a former police major who switched sides and joined the rebellion. If we are fighting for freedom, we are ready to die for it.

Gaddafi is fighting a rebellion which has swept through his Mediterranean oil producing nation after uprisings toppled entrenched leaders in neighbouring Tunisia and Egypt. His fierce crackdown has killed hundreds, triggering U.N. sanctions and Western condemnation, but has not turned the tide of protests.

Residents even in parts of the capital Tripoli have thrown up barricades against government forces. A general in the east of the country, where Gaddafi's power has evaporated, told Reuters his forces were ready to help rebels in the west.

Our brothers in Tripoli say: ‘We are fine so far, we do not need help'. If they ask for help we are ready to move, said General Ahmed el-Gatrani, one of most senior figures in the mutinous army in Benghazi.

Analysts say they expect rebels eventually to take the capital and kill or capture Gaddafi, but add that he has the firepower to foment chaos or civil war -- a prospect he and his sons have warned of.

Monday looked likely to see nervousness in oil markets. NYMEX crude for April delivery was up $1.38 at $99.25 per barrel at 0722 GMT. Libya pumps only 2 percent of world oil and Saudi Arabia has boosted output, but traders fear turmoil intensifying in the Arab world.

Serbian television quoted Gaddafi as blaming foreigners and al Qaeda for the unrest and condemning the U.N. Security Council for imposing sanctions and ordering a war crimes inquiry.

The people of Libya support me. Small groups of rebels are surrounded and will be dealt with, he said.

STAND DOWN CALLS

European powers said it was time for Gaddafi to stand down and Secretary of State Hillary Clinton said the United States was reaching out to opposition groups.

Residents of Zawiyah told of fierce fighting against pro-Gaddafi paramilitaries armed with heavy weapons.

Gaddafi is crazy. His people shot at us using rocket-propelled grenades, said a man who gave his name as Mustafa. Another man called Chawki said: We need justice. People are being killed. Gaddafi's people shot my nephew.

There were queues outside banks in Tripoli on Sunday for the 500 Libyan dinars the government had promised it would start distributing to each family.

From Misrata, a city 200 km (120 miles) east of Tripoli, residents said by phone a thrust by forces loyal to Gaddafi, operating from the airport, had been rebuffed with bloodshed.

But Libyan exile groups said later aircraft were firing on the city's radio station.

In the eastern city of Benghazi, opponents of the 68-year-old leader said they had formed a National Libyan Council to be the face of the revolution, but it was unclear who they represented.

They said they wanted no foreign intervention and had not made contact with foreign governments.

The Network of Free Ulema, claiming to represent some of Libya's most senior and most respected Muslim scholars, issued a statement urging total rebellion and endorsing the formation of an interim government announced two days ago.

FOREIGN WORKERS STRANDED

Western leaders, emboldened by evacuations that have brought home many of their citizens from the vast desert state, spoke out more clearly than before against Gaddafi.

We have reached, I believe, a point of no return, Italy's Foreign Minister Franco Frattini said, adding it was inevitable that Gaddafi would leave power.

Britain revoked Gaddafi's diplomatic immunity and said it was freezing his family's assets. It is time for Colonel Gaddafi to go, Foreign Secretary William Hague said.

Britain's former prime minister, Tony Blair, said he had spoken to Gaddafi on Friday and told him to go. Blair helped end the Western isolation of Gaddafi after he agreed to renounce weapons of mass destruction, paving the way for big British business deals in Libya.

Three British military planes evacuated 150 civilians from Libya's desert on Sunday, after a similar operation on Saturday.

Wealthy states have sent planes and ships to bring home expatriate workers but many more, from poorer countries, are stranded. Thousands of Egyptians streamed into Tunisia on Sunday, complaining Cairo had done nothing to help them.

Malta said it had refused a Libyan request to return two warplanes brought to the island by defecting pilots last Monday.

Gaddafi, once branded a mad dog by Washington for his support of militant groups worldwide, had been embraced by the West in recent years in return for renouncing some weapons programmes and, critically, for opening up Libya's oilfields.

While money has flowed into Libya, many people, especially in the long-restive and oil-rich east, have seen little benefit and, inspired by the popular overthrow of veteran strongmen in neighbouring Tunisia and Egypt, they rose up to demand better conditions and political freedoms.