Kadhafi's forces overran the towns of Ras Lanuf, Uqayla and Brega, scattering outgunned rebels as world powers mulled arming the rag-tag fighters seeking to oust the Libyan strongman.

AFP reporters and rebel fighters said Kadhafi's troops swept through the oil town of Ras Lanuf, 300 kilometres (185 miles) east of Kadhafi's hometown Sirte, soon after dawn, blazing away with tanks and heavy artillery fire.

But later, an air strike about 10 kilometres (6.5 miles) west of Ajdabiya, where rebels are sheltering, sent a huge plume of smoke rising into the sky and brought cries of jubilation from the rebel fighters, who had been calling for renewed air support.

Panicked rebels called for air strikes as they fled in their hundreds eastwards through Uqayla, where they briefly regrouped, then on to Brega, where they also halted temporarily before charging to the main city of Ajdabiya, 120 kilometres away.

"We want two things: that the planes drop bombs on Kadhafi's tanks and heavy artillery; and that they (the West) give us weapons so we can fight," rebel fighter Yunes Abdelghaim told AFP.

The 27-year-old, who was holding a Russian AK-47 assault rifle and French flag, said it seemed as if the coalition had halted its air strikes for two days coinciding with a London conference on the Libyan crisis.

"We want the French to bomb the (Kadhafi) soldiers," said another fighter, Ali Atia al-Faturi, as the sound of shelling and gunfire grew louder.

By nightfall, the town of Brega, which also has an oil refinery, was in the hands of loyalists, rebels said, and the sound of artillery fire could be heard on the outskirts of Ajdabiya.

Angry mumblings against French President Nicolas Sarkozy, hitherto seen as the rebel's principal protector, were heard.

"Why aren't they bombing? We've heard things like Sarkozy is backing out of this situation," said Abdullah Shwahdi, a 25-year-old fighter.

On Tuesday the rebels came within 100 km of Sirte before encountering fierce resistance which reversed an advance launched when Britain, France and the United States started UN-mandated air strikes on March 19.

The ceding of almost all the flat, arid terrain the rebels had taken control of just five days ago was an unplanned, almost panicky affair.

Talk by the rebel Transitional National Council in its Benghazi stronghold of a "tactical retreat" was clearly hollow. The insurgents -- most of them overconfident young men with no military training or discipline whatsoever -- know nothing of tactics.

Britain is expelling five Libyan diplomats including the country's military attache, for intimidating opposition groups in London, Foreign Secretary William Hague said, while the Netherlands has frozen more than three billion euros ($4 billion) of assets as part of EU sanctions against the Libyan regime.

"We informed the parliament that 3.1 billion euros of Libyan assets have been frozen since March 2," a spokesman for Dutch Finance Minister Niels Redeker told AFP.

NATO began to take command of Libyan air operations from a US-led coalition as warplanes and other assets from several allies came under the military organisation's control.

"Today NATO aircraft are flying under NATO command in the Libyan sky," NATO spokeswoman Oana Lungescu told AFP.

"This is a phased process, which will be completed as soon as all allies and partners have transferred authority for their assets," Lungescu said.

As the insurgents were being routed, British Prime Minister David Cameron said in London the option of arming the rebellion had not been ruled out.

Asked in parliament what Britain's policy was on arming the rebels, given the existence of a United Nations arms embargo on Libya, Cameron replied: "We do not rule it out but we have not taken the decision to do so."

French Foreign Minister Alain Juppe had set the tone at a London conference on Tuesday when he said France is prepared to hold discussions on delivering arms to the rebels.

Russian Foreign Minister Sergei Lavrov said however Moscow believed that foreign powers did not have the right to do this under the mandate approved by the UN Security Council.

Belgium, too, voiced its opposition to sending arms to Libya, warning that the move could alienate Arab nations.

And in Beijing, China's President Hu Jintao warned French President Nicolas Sarkozy that air strikes on Libya could violate the "original intention" of the UN resolution authorising them if civilians suffer.

US Secretary of State Hillary Clinton said that although UN sanctions prohibit the delivery of arms to Libya, the ban no longer applies.

"It is our interpretation that (UN Security Council resolution) 1973 amended or overrode the absolute prohibition on arms to anyone in Libya, so that there could be a legitimate transfer of arms if a country should choose to do that," she said.

A spokesman for the rebel Transitional National Council, Mustafa Ghuriani, told reporters in the Benghazi "it would be naive to think we are not arming ourselves" to match the weaponry deployed by Kadhafi loyalists.

But he declined to confirm or deny that France and the United States were offering to supply arms, saying only that unspecified "friendly nations" were backing the rebels.

US President Barack Obama, who has laid out a moral imperative for protecting Libyan civilians caught in the battle, also said he did not rule out arming the rebels.

"I'm not ruling it out. But I'm also not ruling it in. We're still making an assessment partly about what Kadhafi's forces are going to be doing," Obama said.

Obama said the "noose" was tightening around the Libyan strongman, but noted that Kadhafi did not appear to be seeking to negotiate an exit from Libya yet, despite the bombardment of his forces.

But he added he believed Kadhafi would eventually quit.

"Our expectation is that as we continue to apply steady pressure, not only militarily but also through these other means, that Kadhafi will ultimately step down," he said.

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