Libyan armed forces loyal to Muammar Gaddafi have cleared "armed gangs" from the oil-rich town of Brega in the east, an army source told state television on Sunday.
"Brega has been cleansed of armed gangs," the military source was quoted as saying. The report could not immediately be verified. State television has in the past issued false reports claiming territory.
But the claim comes amid a string of setbacks for the rebels who have lost several cities in the east to pro-Gaddafi forces. Brega's fall into the hands of Gaddafi loyalists would deal a further blow to the opposition's morale and momentum.
Pro-Gaddafi forces have been swiftly advancing on the poorly equipped and loosely organised rebels who had seized much of the eastern parts of the country since the uprising against Gaddafi's decades-long rule began last month.
On Saturday, pro-Gaddafi forces pushed the frontline deeper into rebel territory to just 40km outside Brega, the site of a major oil terminal.
The AFP news agency quoted rebel sources as saying government forces were advancing from the west after seizing the town of Uqayla and the village of Bisher 20km from Brega.
The sources said a few pockets were holding out near Bisher.
Retreating fighters, most of them young, were seen on trucks mounted with anti-aircraft guns along the coastal road heading towards Ajdabiya, 80km away, the gateway to the main rebel cities of Benghazi and Tobruk.
No air activity was seen but artillery bombardments were continuing, according to rebel sources.
An initial rush westward from their eastern strongholds had taken the rebels to beyond Ras Lanuf, 40km west of Brega, last week. But Gaddafi's deployment of superior forces has sent them beating a hasty retreat.
Apart from defectors from Gaddafi's army, the rebels have no military experience, few heavy weapons and they are virtually powerless against air attacks.
Al Jazeera's Tony Birtley, reporting from the rebel stronghold of Benghazi, said: "We have to remember that this is not an organised army. This is a group of teachers, engineers, street cleaners - people who have had no association with weapons whatsoever.
"And now they're coming up against very strong, well-equipped forces. And we are seeing a lot of casualties. Basically if it is not sorted out soon, then those casualty figures are going to go up and up and up.
"It's not a very good situation at the moment; it is not looking very positive, quite the reverse."
International pressure is growing for a no-fly zone to be imposed over Libya but the move, approved in a key resolution by the Arab League on Saturday in Cairo, still faces opposition from UN Security Council heavyweights Russia and China.
Libya responded to the Arab League resolution calling it "an unacceptable departure" from the body's charter, state television said on Sunday.
The US hailed the Arab League decision as an "important step".