Rival Libyan fighters who clashed in towns south of Tripoli have settled their deadly dispute through a prisoner swap and agreed to a ceasefire, local officials said on Monday.

"Last night (Sunday) we carried out a prisoner swap... since then, the fighting has stopped," Colonel Ahmed Omar Ibrahim al-Fakhi of the Gharyan military council told AFP.

"We had captured around 24 fighters from Assaba. They had captured four of our men. We exchanged the prisoners in Gharyan," he added.

Doctor Ibrahim al-Karim, deputy head of central Gharyan hospital, said four people were killed and more than 50 wounded in the clashes which erupted on Friday.

Witnesses said the fighting broke out after a man from Gharyan was stabbed and stripped naked in a vegetable market between the adjacent towns of Assaba and Gharyan, some 80 kilometres (50 miles) south of Tripoli.

Fighters of The Martyrs Brigade of Gharyan said they came under fire from Assaba while setting up a checkpoint near the market area. Intense fighting involving rocket and machinegun fire ensued.

"The people who attacked us from Assaba are loyalists of (ousted leader) Muammar Gaddafi," said Mohammed al-Matati, a Gharyan fighter receiving treatment for burn wounds at the hospital.

Ibrahim Omar Saadi, head of Gharyan civil council, told reporters that the towns had sent civil and military representatives to Tripoli where they negotiated a 48-hour ceasefire that came into effect at 5 pm on Sunday.

Gharyan, he said, had passed on three demands to Assaba's delegates.

"We want them to hand over their weapons to the defence ministry... to hand over the murderers of five of our rebels who were killed on September 10... and to hand over to the government (former) Gaddafi soldiers," in Assaba.

Saadi accused Gaddafi loyalists of sparking the unrest. "The fighting was between Gharyan revolutionaries and Gaddafi loyalists" in Assaba, he said.