Dozens of rebels were seen leaving the coastal town of Brega and heading for Ajdabiya, 80 kilometres (50 miles) away on the road to the main rebel cities of Benghazi and Tobruk.
Rebel sources said forces loyal to strongman Muamer Gaddafi were approaching from the west, and Libyan state television, quoting an unspecified military source, later declared Brega "purged of the armed gangs."
In Benghazi, 240 kilometres east of Brega, all mobile telephone services were suddenly cut Sunday for an unknown reason. It was not immediately clear if other rebel-held areas were also affected.
Fighters morale had been boosted Saturday by an Arab League decision to support a no-fly zone over Libya and to make contact with the insurgents' provisional national council in Benghazi.
But apart from defectors from Gaddafi's army, the rebels have no military experience, few heavy weapons and are virtually powerless against air attack.
Declaring Gaddafi had lost all legitimacy, Arab foreign ministers urged the UN Security Council "to assume its responsibilities in the face of the deteriorating situation in Libya and take the necessary measures to impose an air exclusion zone for Libyan warplanes."
The United States welcomed the decision, which "strengthens the international pressure on Kadhafi and support for the Libyan people," White House spokesman Jay Carney said in a statement.
"The international community is unified in sending a clear message that the violence in Libya must stop, and that the Gaddafi regime must be held accountable.
"The United States will continue to advance our efforts to pressure Gaddafi, to support the Libyan opposition, and to prepare for all contingencies, in close coordination with our international partners," Carney added.
But he stopped short of giving full support for the no-fly zone which is being pushed for by Britain and France especially, reflecting divisions in the administration of President Barack Obama.
US Secretary of State Hillary Clinton was leaving on Sunday for an overseas tour to find ways to help Libya's opposition and maintain the momentum of pro-democracy revolutions in the region.
She is due first in Paris for talks with Mahmud Jibril, a member of the opposition national council, before going on to Tunisia and Egypt, whose autocratic presidents were toppled in January and February respectively.
In Paris Monday Clinton will also meet her counterparts from host France as well as other G8 members Russia, Britain, Canada, Germany, Italy and Japan to discuss Libya.
The United States has agreed to name a special envoy to deal with the opposition, but has refrained from recognising any particular leader or group as it struggles to understand the nebulous movement.
Clinton has said a plan for a no-fly zone would be presented to NATO on Tuesday.
Washington has said it would soon send humanitarian aid teams to rebel-held areas of eastern Libya, but cautioned the move should not be seen as military intervention.
Britain's Foreign Office said the Arab League's support for a no-fly zone was "very significant" for its own efforts to introduce the measure.
Britain and France have prepared a UN Security Council resolution on a no-fly zone but face opposition from veto-wielders China and Russia as well as splits within the European Union.
"The outcome of today's Arab League meeting shows Kadhafi's actions do not have support in the region," a Foreign Office spokeswoman said.
"In brutally repressing a popular uprising by his own people, it is clear he is isolated and ignoring the will of the international community."
Canadian Foreign Minister Lawrence Cannon also hailed the Arab League's move, saying, "In light of the grave and deteriorating situation in Libya, and Muamer Gaddafi's reckless disregard for the lives of the Libyan people, this resolution clearly signals that Kadhafi does not have support in the region."
A UN envoy arrived in Tripoli on Saturday to discuss with Libyan officials access to the country for humanitarian relief efforts, the United Nations said.
Tripoli has so far not mentioned a mission by former Jordanian foreign minister Abdul Ilah Khatib, dispatched by UN chief Ban Ki-moon to raise international concerns about Gaddafi's uncompromising response to the uprising.
Khatib, due in Tripoli early next week, would put across to the regime "in no uncertain terms the concerns of the United Nations and the international community," Ban told reporters in New York.
The envoy would have a political role in trying to end the conflict but also to try to open up humanitarian access to the Libyan population, Ban said.
Elsewhere in the trouble-torn region dozens of people were wounded in fresh clashes Sunday between Yemeni police, regime loyalists and anti-government protesters at the main opposition sit-in in the capital, witnesses said.
Earlier two protesters died, a day after police shot them in the head, a medic said, raising the death toll to seven from demonstrations against President Ali Abdullah Saleh.
In Bahrain police fired tear gas and clashed with protesters trying to occupy Manama's banking centre, on the second day of violent demonstrations in the tiny Gulf state.
And Oman's sultan granted legislative power to the previously toothless Oman Council after weeks of anti-government protests in the strategic Gulf state.