One fighter, returning wounded from Bin Jawad to rebel-held Ras Lanuf further east, said Gaddafi loyalists had attacked advancing rebels with machineguns and rocket-propelled grenades.
Asked what he had seen, he replied: "Death." Distraught and bandaged, he would not say any more.
Rebels had taken Bin Jawad, 160 km (100 miles) from Sirte, on Saturday but later withdrew, which let army units occupy local homes and set up sniper and rocket propelled grenade positions for an ambush that forced rebels back to Ras Lanuf.
"It's real fierce fighting, like Vietnam," rebel fighter Ali Othman told Reuters. "Every kind of weapon is being used. We've retreated from an ambush and we are going to regroup."
"Gaddafi's forces attacked with aircraft and shot from on top of the houses," Ibrahim Boudabbous, a fighter who took part in the rebel advance, said.
Doctors and other staff at Ras Lanuf hospital said two dead and 22 injured had arrived so far from fighting in Bin Jawad.
During the fighting, Libyan forces said they had shot down a helicopter. Three rebel fighters told Reuters they had seen it falling into the sea, but no further details were available.
Dozens of rebel vehicles armed with heavy machineguns arrived in Ras Lanuf after the ambush and were regrouping.
Other rebel fighters in Ras Lanuf said they had received news of the attack by telephone from the frontline. "Some rebels have been hit by snipers," one of them, Khamis al-Libi, said.
The government said on Sunday it had driven the rebels, who took over eastern Libya over a week ago, all the way back to their eastern stronghold of Benghazi.
But the rebels were still clearly in control of Benghazi and the key oil complex of Ras Lanuf, which they took on Friday night. "They're all rebels here," a witness in Ras Lanuf said. A warplane struck Ras Lanuf on Sunday but no one was hurt.
Britain has a diplomatic team in the city of Benghazi, Defence Secretary Liam Fox said. He declined comment on a report Libyan rebels had captured a British special forces unit.
One rebel commander said earlier his forces had pushed west from Bin Jawad and controlled the town of al-Nawfaliyah, 120 km (74 miles) from Sirte, where they would await a call from citizens in Sirte before advancing.
"It's not difficult to take Sirte," Colonel Bashir Abdul Gadir told Reuters. "I think 70 percent of regular people are with us there, but they have asked us not to go into Sirte fearing heavy battles. We're going to wait till they call us to let us know when they are ready."
The colonel, speaking earlier in Ras Lanuf, told a news conference there were about 8,000 rebel soldiers between Ras Lanuf and al-Nawfaliyah and Gaddafi's forces were reinforcing the Libyan leader's hometown of Sirte, further west down the coast, from the south.
"We have our brothers in Sirte and they won't accept this situation. They know he is a killer and stole our money and they are going to be with us," Abdul Gadir said, denying the latest Libyan government statements that it controls Ras Lanuf.
"We have a lot of people in Sirte and they are ready to join with us," he said, adding: "We brought down a jet in Ras Lanuf and a helicopter in Nawfaliyah."
On the rebel force, Abdul Gadir said: "We are not an organised army. We don't use military tactics. Our tactics are revolutionary. We don't take into account death as they do."
He said: "This is the nature of the people's revolution. you can't control it, only 10 percent of us are professional soldiers. That's it."
In Libya's eastern second city of Benghazi, where the uprising began, Colonel Lamine Abdelwahab, a member of the rebel military council for the Benghazi area, said:
"We have received contact from members of the Gaddafda tribe (Gaddafi's tribe) in Sirte who want to negotiate ... There will be no negotiations. They are asking us what we want. We say we don't want Gaddafi (in power)."
Abdelwahab said soldiers belonging to the Ferjan tribes were executed for refusing to fight rebels. "They (the Ferjan tribe in Sirte) are joining the rebellion because of this atrocity. The problem is that they are unarmed. Only the Gaddafda were armed by the regime."
Gaddafi may have more than 20,000 fighters in Sirte, he said, adding that the city houses the Saadi (son of Gaddafi) battalion which includes four brigades, in addition to his armed tribe members.
He said the commander of the battalion, consisting of about 90 percent Gaddafda, is Abdellah Massaoud, a cousin of Gaddafi.