Libyan leader Col Muammar Gaddafi has said his people will take up arms if a no-fly zone is imposed by Western nations or the UN, as many of 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.
Meanwhile, pro-Gaddafi forces shelled Zawiya's suburbs and tried to gain control of the main square.
The US has said any decision on a no-fly zone over Libya rests with the UN.
More than 1,000 people are believed to have died since rebels began their uprising nearly three weeks ago to end Col Gaddafi's 41 years in power. About 212,000 people - most of them migrant workers - have fled the country, the UN estimates.
'Belligerent' mood "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," Col Gaddafi said in an interview with Turkish TRT TV.
"Then the Libyan people will take up arms against them," he said.
The Libyan leader also made a speech broadcast on state TV in the early hours of Wednesday morning, in which he said European governments and al-Qaeda were trying to divide the country.
The eastern city of Benghazi has become the headquarters for the revolt.
The BBC's Wyre Davies, in Tripoli, says the Libyan leader appeared in increasingly confident and belligerent mood. He showed no sign of willingness to compromise or talk to the opposition.
The city of Zawiya, which fell to the rebels two weeks ago, is almost completely cut off. However, there were reports of heavy shelling and considerable loss of life, as the rebels tried to repel a huge onslaught by pro-Gaddafi troops.
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," he said.Reuters also said the refinery in Zawiya had been shut down by the fighting, quoting an official at the plant.
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.
Options Calls for military intervention are growing as pro-Gaddafi forces step up their counter-offensive.
However, US Secretary of State Hillary Clinton has cautioned that any decision to impose a no-fly zone over Libya should be made by the UN and not by Washington.
A no-fly zone 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 UK and France are working on a UN Security Council resolution for a no-fly zone; however, Russia has already stated its opposition to military intervention.
Nato defence ministers will discuss options for Libya on Thursday and Friday.