General Abdel Fatah Younis, the chief of staff of the rebel forces in Libya, has been arrested by the National Transition Council.
He is being held at an undisclosed military garrison in Benghazi.
A rebel source said Younis was recalled from Brega early on Thursday, but could not say why.
Reuters news agency said a senior member of the NTC confirmed Younes was in Benghazi but said he had returned from the front line unhappy with the situation on the ground, and officials were trying to persuade him to return.
Al Jazeera's Tony Birtley, reporting from Benghazi, quoted unconfirmed reports as saying Libya's former minister of interior was arrested for dealing with and smuggling arms to Gaddafi loyalists. Younis defected to the rebel side in February.
"He spent 40 years as one of Gaddafi's right hand men as minister of defence and in charge of the special forces. So when he came over five months ago to the opposition cause it was quite a coup. But some people have had their doubts about… his loyalties...
Some of his men have come back from the front line demanding his release. This is an ugly situation in the making," our correspondent said.
Meanwhile, Libyan opposition fighters in the western mountains have launched attacks on several government-controlled towns, hoping to push out loyalist troops and open a route to the border.
The attacks began around dawn as rebels descended from around the towns of Nalut and Jadu in an attempt to expel forces loyal to Libyan leader Muammar Gaddafi from the Nafusa mountain foothills.
By midday local time, rebels had taken and lost the town of al-Jawsh and reached the outskirts of Ghazaya, a significant base for Gaddafi's troops near the Tunisian border.
Four rebels were killed and 10 injured, while 18 loyalist troops were captured, according to opposition sources.
|Rebels from Nalut assemble before moving out to attack Gaddafi positions [Nalut Media Committee]
Al Jazeera's James Bays, who approached al-Jawsh with the rebel advance, said fighters initially took the town and moved on but were caught by a surprise counterattack.
Despite hitting al-Jawsh with artillery fire and attempting to clear out Gaddafi's troops, some regime forces apparently remained in town, while others fired Grad rockets after the rebels entered.
Farther west, Ghazaya had been bombard by rebel tanks and "long-range guns" throughout Wednesday night in preparation for the attack, an opposition source said.
The fight for Ghazaya continued into Thursday afternoon, and rebels claimed to have seized the nearby town of Takut. A rebel spokesman in Jadu claimed rebels had taken Ghazaya, but that claim was not confirmed by other sources.
Hundreds of trucks carrying hundreds of fighters were involved in the operation at al-Jawsh, Bays said.
It appeared to be the largest attack by opposition fighters in the Nafusa Mountains since the conflict began.
On Wednesday, the political vice continued to squeeze Gaddafi's government, with the UK officially announcing its recognition for the Libyan opposition as the sole legitimate authority in the country.
Khaled Kaim, Gaddafi's deputy foreign minister, condemned the decision as "irresponsible, illegal and in violation of British and international laws" in a press conference in Tripoli.
He said the government "will take necessary actions" and pursue a legal challenge to the move in both British and international courts.
|Al Jazeera's Barnaby Phillips reports on the British recognition of the opposition National Transition Council
William Hague, the UK foreign minister, announced the recognition of the National Transitional Council (NTC) on Wednesday, 12 days after the US made a similar move.
Britain also asked all diplomats belonging to Gaddafi's government to leave the country.
Recognition in the UK means the NTC can send its own diplomatic personnel, who will be treated like the representatives of any other government, and can receive millions of dollars in frozen oil funds.
Mahmud al-Naku, a Libyan exile in Britain, has been tapped as the NTC's ambassador, an opposition official announced on Wednesday.
Britain will transfer about $147m in frozen assets to the NTC and has already said it will extend a $143m loan based on frozen Libyan funds.
"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," Hague said on Wednesday.
"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."
The current charge d'affaires and all eight remaining staff and their dependents have three days to leave the country, the UK foreign office 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 Libyan fighters.
Al Jazeera's Anita McNaught, reporting from the opposition stronghold of Benghazi in eastern Libya, said that the release of frozen funds 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 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.
Britain's diplomatic moves implement a decision made at the July 15 meeting in Istanbul.
The US, Britain and 30 other nations recognised the NTC as the country's legitimate government, and individual countries have followed that collective acknowledgement with individual announcements.
But not all countries involved in the Libyan conflict have fallen in line.
Russia has criticised such moves as a "policy of isolation" that takes sides in a civil war and goes beyond the UN mandate of protecting civilians.
Russia has said Gaddafi must go and has recognised the NTC as a party to negotiations to end the conflict, but it has not disavowed Gaddafi's government or said the NTC is the sole representative of the Libyan people.