Syrian forces have retreated from a rebel-held town under a local ceasefire, residents said, but deadly violence raged on elsewhere as a month-long mandate for Arab League peace monitors in Syria was expiring.

The head of the monitoring team was still working on his report and would not arrive at the League's Cairo headquarters until Saturday, the day before Arab foreign ministers are due to weigh their next move on Syria, a League source said.

Twenty people, including two army officers, were reported killed across Syria on Thursday, adding to a death toll of more than 600 since the Arab League observers arrived.

An armed insurgency is taking hold in some areas, hardening what began 10 months ago as a mostly peaceful struggle against President Bashar al-Assad's authoritarian rule.

Residents of Zabadani said on Thursday troops and tanks that had besieged the insurgent-controlled town had pulled back after a deal to end days of fighting, according to an opposition leader.

Dozens of armoured vehicles that had encircled Zabadani, a hill resort near the Lebanese border, withdrew to garrisons 8 km (5 miles) away, Kamal al-Labwani told Reuters.

The Arab League monitoring mandate was expiring on Thursday night, with the foreign ministers at odds over how to respond to the turmoil in which thousands of people have been killed.

They are in a big mess, a source close to the League said. They are running out of options.

Another League source said the chief monitor, Mohammed al-Dabi, had yet to complete his findings for Sunday's meeting of the foreign ministers.

Dabi is still working on the report and has postponed his arrival to Cairo to Saturday evening so that the report includes the latest scenes and updates witnessed by Arab monitors there, the source told Reuters

The leader of Syria's Muslim Brotherhood said world powers should pile diplomatic pressure on Assad and set up a no-fly zone and safe zones to help the opposition.

ISOLATE SYRIA

The international community should ... should fully isolate this regime, pull out their ambassadors and expel the regime's ambassadors, Mohammad Shaqfa told Reuters in a telephone interview.

The European Union, the Arab League and other powers have already imposed sanctions on Syria, in the wake of the unrest. That pressure, and the continuing violence, has driven the value of the Syrian pound down by 50 percent on the black market, exchange dealers said.

Syria was planning to introduce a managed float of its exchange rate, effectively devaluing the currency, the country's central bank governor Adib Mayaleh told the Financial Times on Friday.

Assad, whose father crushed an armed Brotherhood revolt in 1982, says Syria is facing a foreign conspiracy that is using Islamist militants to destroy a bastion of Arab nationalism.

The country is capable of overcoming the current conditions and building a strong Syria, Assad told a delegation calling itself the Arab People's Initiative for Fighting Foreign Intervention in Syria, the state news agency SANA reported.

The U.N. Security Council is split over Syria, with Russia declaring it will work with China to block any move to authorise military intervention.

Western powers have acknowledged that a Libya-style campaign in Syria would be fraught with danger, but want the council at least to condemn Assad's repression and impose sanctions.

Reliable casualty figures are hard to come by in Syria, where media access has been limited and the outside world has had to piece together a picture from the conflicting accounts of the parties to an inchoate and increasingly bloody struggle.

The opposition Syrian Observatory for Human Rights said 454 civilians had been killed since the Arab observers deployed on December 26 to verify whether an Arab peace plan was working.

It said 146 members of the security forces, including 27 who had deserted to the opposition, had also been killed. The Observatory's figures did not include 26 people who authorities said were killed by a suicide bomber in Damascus on January 6.

The British-based Observatory reported at least 18 more civilian deaths across Syria on Thursday and said an insurgent attack in Hama had killed an army brigadier and a lieutenant.

Asked if the Arab monitors had made a difference, Rami Abdul-Rahman, the name used by the Observatory's director, said: Yes, in the first week, the number of deaths fell sharply. After that, no, the numbers rose.

The Avaaz advocacy group said 746 civilians had been killed over the past month, and it urged the Arab League to ask the Security Council to impose punitive measures against Assad.

TREATED WITH CONTEMPT

Arab League observers have now observed Assad's brutality first hand, Avaaz director Ricken Patel said. Their mission has been treated with contempt and failed on every objective.

The United Nations said on December 13 that security forces had killed more than 5,000 people in Syria since March. A week later Damascus said insurgents had killed 2,000 security personnel.

The Arab League suspended Syria and announced sanctions for its failure to comply with a November peace plan which required that it halt the bloodshed, withdraw military forces from the streets, free detainees, provide access to Arab monitors and the media, and open a political dialogue with opposition groups.

Assad's foes say the Arab monitoring mission has only given him diplomatic cover to pursue a violent crackdown.

European Union governments are expected on Monday to expand the list of people and Syrian companies and institutions targeted by EU sanctions, diplomats said in Brussels.

(Additional reporting by Khaled Yacoub Oweis in Amman and Erika Solomon in Beirut; Editing by David Stamp and Andrew Heavens)