Forces loyal to Libyan leader Colonel Muammar Gaddafi have full control of the key western front line town of Zlitan, Libyan officials say.
They had launched a counter-offensive on Wednesday against advancing rebels, who have been fighting government forces with Nato’s support since March.
Libyan officials also said three civilians were killed in a Nato air strike on the outskirts of Zlitan.
Nato said it was investigating the accusation.
A Nato official said a target in the Zlitan area had been struck at 06:30 local time (04:30 GMT) on Thursday morning.
“We are aware of allegations of civilian casualties and we always take such allegations seriously,” a Nato statement said.
Coalition forces began operations in Libya under a UN mandate authorising military action for the protection of civilians.
Over recent weeks, the rebels have been slowly advancing on Zlitan from the port city of Misrata, 70km (45 miles) to the east.
From Zlitan, their intention is to advance about 160km (100 miles) along the road to Tripoli. (BBC)
