At least 10 rebels were killed by a coalition air strike on Friday, fighters at the scene said on Saturday, in an increasingly chaotic battle with Muammar Gaddafi's forces over the oil town of Brega.
The rebel leadership described the deaths as an unfortunate mistake and called for continued air strikes against Gaddafi's forces, who have reversed a rebel advance along the coastal highway linking their eastern stronghold with western Libya.
Hundreds of mostly young, inexperienced volunteers could later be seen fleeing east from Brega towards the town of Ajdabiyah after coming under heavy mortar and machinegun fire.
A contingent of more experienced and better organised rebel units initially held their ground in Brega, but with most journalists forced east, it was unclear whether they had remained inside the town or pulled back into the desert.
A Reuters correspondent visiting the scene of the air strike saw at least four burnt-out vehicles including an ambulance by the side of the road near the eastern entrance to the town.
Men prayed at freshly dug graves covered by the rebel red, black and green flag nearby.
"Some of Gaddafi's forces sneaked in among the rebels and fired anti-aircraft guns in the air," said rebel fighter Mustafa Ali Omar. "After that the NATO forces came and bombed them."
Rebel fighters at the scene said as many as 14 people may have died in the bombing, which they said happened around 10 p.m. local time (2000 GMT) on Friday.
But at the rebel headquarters in the eastern city of Benghazi, spokesman Mustafa Gheriani told Reuters that the rebel leadership still wanted and needed allied air strikes.
"You have to look at the big picture. Mistakes will happen. We are trying to get rid of Gaddafi and there will be casualties, although of course it does not make us happy".
He could not confirm that rebels had died in the air strike.
In Brussels, a spokeswoman for NATO, which this week assumed command of the military operation launched on March 19, said the alliance was looking into the reports.
Gaddafi forces fired rockets on Brega overnight and fighting continued further west around the town's university early on Saturday, rebels said.
But at the eastern gate of the town, dust rose from the road as volunteers known as the "shebab", or youth, streamed away in cars after coming under heavy fire from Gaddafi's forces.
The volunteers have frequently fled under fire, raising questions about whether the rebels will be able to make any headway against Gaddafi's better-equipped and better-trained forces without great Western military involvement.
REBELS FEAR INFILTRATION BY GADDAFI LOYALISTS
Brega is one of a string of oil towns along the coast that have been taken and retaken by each side after the U.N. mandated intervention which was intended to protect civilians in Libya.
Rebels have been trying to marshal their rag-tag units into a more disciplined force after a rebel advance along about 200 km (125 miles) of coast west from Brega was repulsed and turned into a rapid retreat this week.
By mid-afternoon, dozens of volunteer fighters were waiting with their pick-ups at a checkpoint east of Brega close to the positions they held two days earlier.
Volunteer fighter Khalid Salah said the rebels were waiting for the arrival of heavy weapons to begin another counter-attack. Aircraft could be heard occasionally overhead.
Fear that Gaddafi was using spies to infiltrate and undermine the rebels added to the tension.
The stalled rebel campaign has left rebel-held areas in western Libya, notably the city of Misrata, stranded and facing fierce attack from Gaddafi's forces. "They are trying to starve and kill people inside the city by all means," said a British-based doctor who had spoken to his friends in Misrata on Saturday.
But he said the city was quieter after heavy shelling on Friday. "People are a bit relieved."
On Friday, a rebel leader, speaking after talks with a U.N. envoy in Benghazi, offered a truce on condition that Gaddafi left Libya and his forces quit cities under government control.
The Libyan government dismissed the ceasefire call.
"They are asking us to withdraw from our own cities .... If this is not mad then I don't know what this is. We will not leave our cities," spokesman Mussa Ibrahim told reporters.'
State-controlled Libyan television also said that coalition forces bombarded "civilian and military locations" in western Libya late on Friday.
It said the strikes were in the towns of Khoms, between the capital Tripoli and Misrata, and Arrujban, in the southwest.
Showing footage of two men receiving medical treatment while lying in hospital beds, it said, "This is the result of attacks by crusader aggressors in Khoms."
One of the men was shown lying in bed with a bandaged right foot. Blood could be seen on the bandage. The other man was shown having his chest stitched up by a female medic.
A resident in Khoms, contacted by telephone, said he had heard the bombing on Friday. "It was from the area of the naval base," he said. "Today it is quiet."