The Libyan government insists it controls the city, which lies on the vital motorway west to Tunisia.

Zawiya's fall would effectively cut the government off from the outside world.

The city was briefly held by rebel forces early in the uprising against Col Muammar Gaddafi's rule this year but they were driven out by tanks and suffered heavy casualties.

Last week, hundreds of rebels pushed out of the Nafusa Mountains in the west, down towards the towns of the coastal plain in an offensive aimed at ending months of deadlock.

Military success in the west is crucial to the rebels, who have struggled to make advance from their stronghold around Benghazi in the east.

A reporter from Reuters news agency saw around 50 rebels near the main market, with their flags flying from a shop.

"I'm 1,000% [sic] sure we're going to take over Zawiya today and then move on to Tripoli," said Bin Jaffin Ali, 34, a shopkeeper turned fighter.

According to an Associated Press reporter in Zawiya, pro-Gaddafi snipers have been shooting at rebels from a central overpass.

Sporadic loud booms could be heard echoing across the city, and a column of heavy black smoke could be seen rising over the outskirts, the reporter added.

AP's journalist also witnessed rebels operating inside the city, saying they had been greeted by a small group of local men who chanted "Freedom! Freedom!".

The rebels also suffered a setback when a government tank they had captured was bombed by the Nato coalition and four people inside were killed, AFP news agency reports.

The agency showed pictures, first of rebels celebrating as they rode around on the tank, then of a charred hulk.

On Saturday, the government insisted it still controlled Zawiya, thought to be the country's fifth-largest city.

"A very small group of rebels tried to move into the south of Zawiya but were stopped easily because of our armed forces," said government spokesman Moussa Ibrahim.

**Analysis

There is nothing yet to suggest that rebel fighters are in Zawiya in anything like big enough numbers to hold it. But a rebel push on Zawiya, if that is what this is, could be a decisive moment in the war.

It lies on the only remaining supply route for the authorities in Tripoli - west to Tunisia - and it is home to the only oil refinery in that part of the country.

The government in Tripoli says it has full control of the city, and that it is rounding up opposition elements. It says the Libyan army is strong, and will be able to recapture everything that has been lost.

But it also admits Nato air strikes have been helping the rebels to advance. And it knows that if Zawiya falls, Tripoli will be cut off.

**Matthew Price, BBC News, Tripoli