Britain has officially recognised Libya's main opposition group as the country's legitimate government, and asked all diplomats belonging to Muammar Gaddafi's government to leave the United Kingdom.
William Hague, the UK foreign secretary, said on Wednesday that Britain was unfreezing 91m pounds ($150m) of Libyan oil assets to help the National Transitional Council, which the country now recognises as "the sole governmental authority in Libya".
"We will deal with the National Transitional Council on the same basis as other governments around the world," Hague said.
"In line with this decision, we summoned the Libyan charge d'affaires here to the foreign office this morning and informed him that he and other regime diplomats from the Gaddafi regime must now leave the United Kingdom.
"We no longer recognise them as the representatives of the Libyan government and we are inviting the Libyan National Transitional Council to appoint a new Libyan diplomatic envoy to take over the Libyan embassy in London."
Khaled Kaim, the Libyan deputy foreign minister, told a news conference in Tripoli that Britain's recognition of the NTC was "irresponsible [and] illegal".
"We consider this is irresponsible, illegal and in violation of British and international laws," he said.
In an audio message to loyalists on Wednesday, Gaddafi said that he and his people were "ready to sacrifice" in order to defeat NATO and the rebels.
"Political, economic boost"
Al Jazeera's Anita McNaught, in the Libyan rebel stronghold of Benghazi, reported that the funds in particular would be welcomed by NTC leaders, as they had been running dangerously low on cash. She said that if the funds were handed over to the oil company that Hague named in his statement, they could go towards repairing an oil pipeline to one of the east's largest oil fields, in Soriya.
Mustafa Abdul Jalil, the head of the NTC, said in a press conference in Benghazi on Wednesday that the UK's decision "gives us a political and economic boost".
"This means Gaddafi and his followers are no longer legitimate,'' he said, while announcing that Libya's new ambassador to the UK would be Mahmud Nacua, who he described as a Libyan exile in Britain.
Britain's diplomatic moves implement a decision made at a July 15 meeting in Istanbul, Turkey during which the US, Britain and 30 other nations recognised Libya's main opposition group as the country's legitimate government.
Russia has criticised such moves as following a "policy of isolation" and going beyond the UN's mandate and taking sides in a civil war.
Britain is one of the leading participants in the NATO campaign, but the government has been under pressure over its failure to remove Gaddafi from power.
It gave the current charge d'affaires and all eight remaining staff and their dependents three days to leave the UK, the foreign office said.
"Abandon all power"
This week Hague said for the first time that Gaddafi might be able to remain in Libya, as long as he is not in power.
Hoda Abdel-Hamid reports on the return of families who were expelled from Misrata by Gaddafi forces
He said that "Gaddafi is going to have to abandon power, all military and civil responsibility", but "what happens to Gaddafi is ultimately a question for the Libyans".
France and the US have made similar statements.
On Wednesday, however, Mustafa Mohamed Abdel Jalil, the NTC's chief, said that the deadline for a proposal involving Gaddafi ceding power and remaining in Libya had expired.
"We made a proposal. The deadline has past. The proposal has expired," Jalil said of the three-point offer during a press conference in Benghazi. Under the proposal, Gaddafi would relinquish all powers and would remain under "close supervision" in a location of the "Libyan people's" choosing, he said.
The proposal marked a major shift from previous opposition demands that Gaddafi leave and be tried for war crimes in The Hague.
Deadlines are approaching for the NATO-led alliance, whose UN mandate for military action - granted on the grounds that it would protect civilians - expires in two months.
Fadi el-Abdallah, an official with the International Criminal Court, has said that that while the ICC cannot comment on political matters, warrants for the arrest of Gaddafi, his son Saif al-Islam Gaddafi and intelligence chief Abdullah al-Senussi are still applicable.
"A political agreement does not affect the legal obligations or the judicial process. Justice must be done, in accordance with the rules of the Rome Statute [the treaty which founded the ICC]," el-Abdallah said.
Luis Moreno-Ocampo, the ICC's chief prosecutor, said on Wednesday that Libya has "an obligation" to arrest Gaddafi, and that any future government would also be subject to the same obligation.
Meanwhile, on Tuesday, Abdul Ilah al-Khatib, the UN special envoy, said parties to Libya's crisis remain deeply
divided on how to end the conflict that has raged since an uprising began.
Khatib this week visited the opposition capital, Benghazi, in Libya's east as well as the capital Tripoli.
A UN statement issued in New York on Tuesday quoted al-Khatib as saying that both sides "remain far apart on reaching agreement on a political solution".
The warring parties, however, both reaffirmed to Khatib "their desire to continue to engage with the UN in the search for a solution," the statement said.
Al-Khatib met Al-Baghdadi Ali Al-Mahmoudi, the Libyan prime minister, who said they had a productive dialogue.
The government however told al-Khatib that NATO must end air attacks before any talks can begin and that Gaddafi's role as leader was non-negotiable.
Gaddafi says he supports talks with the fighters and the West, but has shown no sign of agreeing to cede power after 41 years of unchallenged supremacy, much of it as a pariah in Western eyes.
In his talks with the Benghazi-based opposition leadership council, al-Khatib discussed ideas for ending the war but said later a firm initiative had yet to take shape.
Despite four months of NATO airstrikes on pro-Gaddafi forces, the conflict in Libya remains stalemated, with rebels failing to make significant advances west towards Tripoli.
Opposition leaders have given conflicting signals in recent weeks over whether they would allow Gaddafi and his family to stay in Libya as part of a deal, providing that he first gave up power.
Expatriate political party
Also on Tuesday, Libyan expatriates became the first to take a stab at forming a political party in Benghazi, the AFP news agency reported.
"We call ourselves the New Libya Party because everything was destroyed," said Ramadan Ben Amer, 53, a co-founder of the party, and now a resident of the UAE.
"Gaddafi says he has built Libya brick by brick but, especially Benghazi, he has destroyed it brick by brick."
He said that of the 2,000 individuals who have joined the party in Libya so far, the majority hail from his native Benghazi or Derna - the hometown of co-founder Rajad Mabruk, 65, who lives in Dallas, Texas.
The party is also supported by some 20,000 Libyan expatriates living in the US, Canada and Germany, he said.