Libyan fighters have launched a two-pronged assault on one of the last towns to resist the country's new rulers, clashing with Muammar Gaddafi's supporters inside Bani Walid as a week-long standoff dissolved into street-to-street battles, the revolutionary forces said.

Libya's new rulers had set a deadline today for Gaddafi loyalists in Bani Walid to surrender or face an offensive but decided to attack yesterday evening after Gaddafi forces fired volleys of rockets at the fighters' positions around the town.

Abdullah Kenshil, the former rebels' chief negotiator, said the former rebels were fighting gunmen positioned in houses in the town and the hills that overlooked it.

Anti-Gaddafi forces were moving in from the east and south, and the fighters deepest inside Bani Walid were clashing with Gaddafi's men about a mile from the centre of the town, Mr Kenshil said.

Revolutionary forces also battled loyalists to the east of the Gaddafi stronghold of Sirte on the Mediterranean coast, but were forced to pull back after taking heavy casualties in close-quarters fighting, a spokesman said.

Before the reported assault yesterday on Bani Walid, Gaddafi holdouts in the city fired mortars and rockets toward the fighters' position in a desert dotted with green shrubs and white rocks, killing at least one and wounding several.

Loud explosions were heard about six miles from the front line, followed by plumes of black smoke in the already hazy air. Nato planes circled above.

Nato says it is acting under a UN mandate to guarantee the safety of Libya's civilian population. Its bombing campaign has been crucial to the advance of Gaddafi's military opponents.

Daw Salaheen, the chief commander for the anti-Gaddafi forces' operation at Bani Walid, said his fighters responded with their own rocket fire, and advanced on the town.

"They are inside the city. They are fighting with snipers," Mr Kenshil said. "They forced this on us and it was in self-defence."

He said three Gaddafi loyalists had been wounded and three killed, while the former rebels had one dead and four wounded. He said the former rebels had taken seven prisoners.

Mr Kenshil said the former rebels believed that there were about 600 Gaddafi supporters in and around Bani Walid.

"Snipers are scattered over the hills and the rebels want to chase them," he said. "There is hand-to-hand combat. The population is afraid so we have to go and protect civilians."

Interpol said it had issued its top most-wanted alert for the arrest of Gaddafi, his son Saif al-Islam and the country's ex-chief of military intelligence.

The three are sought by the International Criminal Court for alleged crimes against humanity, and there have been reports Saif al-Islam is in Bani Walid.

The elder Gaddafi has not been seen in public for months and went underground after anti-regime fighters swept into Tripoli on August 21.

As the National Transitional Council tries to establish its authority in Libya, speculation about Gaddafi's whereabouts has centred on his hometown of Sirte, southern Sabha, and Bani Walid, 90 miles south east of Tripoli.

Gaddafi loyalists in all three towns have been given until today to surrender, or face an all-out battle.

Officials in the National Transitional Council - which is the closest thing to a government Libya has now but still has only shaky authority - had set a deadline today for the city of 100,000 to surrender.

They have hoped to negotiate a peaceful entry into the city, but talks with local leaders have gone nowhere.

Before the former rebels announced their offensive, the dozens of fighters deployed at checkpoints outside the city were clearly impatient to move in.

Osama al-Fassi helped unload ammunition from the back of a large truck with a sense of urgency.

The bearded man in sand-coloured fatigues said that with Gaddafi loyalists rocketing the front line, he did not attach much importance to the political leaders' plans on when to move.

"We in the field decide when we enter the city with force," he said as he loaded wooden boxes of Russian manufactured ammunition into a pick up truck that was headed to the front.

The truck was quickly filled with RPGs still in plastic wrapping, small mortar rockets, and metal boxes of ammunition.