NEAR BANI WALID, Libya - Libyan fighters trying to capture one of Muammar Gaddafi's last strongholds battled for the desert town of Bani Walid on Saturday against stiff resistance from Gaddafi loyalists.

Forces of the ruling Transitional National Council (NTC) said they had advanced to within 500 metres (yards) of the town center, but then pulled back shortly before NATO aircraft struck at least seven times at Gaddafi positions around the town.

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Black plumes of smoke rose from surrounding areas and artillery explosions echoed across a rocky valley in Bani Walid's northern outskirts. A rocket fired by Gaddafi loyalists landed in the hills, kicking up clouds of dust.

"Field commanders have told us to retreat because NATO will be bombing soon," fighter Abdul Mulla Mohamed said, driving away in one of dozens of vehicles leaving the town, which lies 150 km (95 miles) southeast of Tripoli.

"All our troops have retreated because of NATO. We are waiting for orders from our comrades to go back in again."

The main NTC positions on the northern approaches to Bani Walid came under fire, with sniper bullets and shells whistling over military pick-up trucks scattered around the narrow valley.

"We are not far from liberating Bani Walid," Daw Saleheen, a representative of the NTC's military council, said earlier. "We urge Gaddafi fighters to lay down their weapons. You can go to any house and will be safe. It is not too late."

Two NTC commanders were killed and two wounded in the fighting. Doctors said two Gaddafi soldiers and one NTC fighter were killed on Friday. Abdullah Kanshil, an NTC official, said four or five civilians had died in overnight fighting.

Kanshil said about 1,000 Gaddafi soldiers were defending the town -- far more than the 150 previously estimated.

"They are launching Grad rockets from private houses so NATO (warplanes) cannot do anything about it," he said.

NTC believes Gaddafi's son in Bani Walid

NTC fighters said they believed Gaddafi's son Saif al-Islam and his spokesman Moussa Ibrahim were still in Bani Walid, which they said had received reinforcements from Sirte and Sabha, a Gaddafi stronghold deep in the southern desert.

Heavy fighting erupted around Bani Walid and the coastal city of Sirte, Gaddafi's birthplace, on Friday, a day ahead of a deadline for a negotiated surrender set by the NTC.

NTC officials said the truce was effectively over, paving the way for what could prove the final battles of a civil war that evolved from February's popular uprising against Gaddafi.

Now that his 42-year rule has ended, diplomats said Britain plans to submit a draft resolution to the UN Security Council early next week to start easing sanctions against Libya and establish a modest UN mission in the country.

The International Monetary Fund also chipped in on Saturday, recognizing the NTC as Libya's legitimate governing body and saying it planned to send a team there when it is safe enough.

NTC forces which finally overran the Libyan capital on Aug. 23 must still capture Gaddafi's last strongholds and find the deposed leader before they can declare Libya liberated and set the clock ticking for elections and a new constitution.

The front lines around Sirte appeared to be quieter after Friday's fighting. The NTC has been sending hundreds of fighters south towards Sabha in the last two days.

It is not known whether Gaddafi, wanted for war crimes by the International Criminal Court in The Hague, is holed up in any of the three main strongholds his loyalists still control.

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