Libyan rebels pushed back from around the oil refinery town of Brega under heavy fire from Muammar Gaddafi's troops on Saturday, as diplomatic efforts gathered pace for a truce.
Dozens of cars and military vehicles were seen pouring East out of Ajdabiya towards the rebel stronghold of Benghazi, as a helicopter bearing a rebel flag flew in the opposite direction towards the front line despite a no-fly zone.
On the diplomatic front, both the European Union and the African Union announced initiatives to help bring about a ceasefire, as Nato's role in the conflict came under renewed scrutiny.
Advancing pro-government forces shelled the retreating rebels west of Ajdabiya, an AFP correspondent in the key Libyan road junction town heard.
At least 10 loud explosions rocked the town's outskirts in a major setback for the rebels, who earlier in the day had pushed towards Brega on the central coast, 80 kilometres (50 miles) further West.
In a sign of the rebels' growing confidence in their ability to combat government forces, they had even allowed foreign journalists to advance halfway to Brega to a point where they established a supply base behind their short-lived front lines, the first time they had done so since on Wednesday.
But they too were forced to beat a hasty retreat as the government forces stepped up the shelling. Cars and military vehicles streamed east using both carriageways of the main highway.
Anti-aircraft guns and rocket-launchers were seen taking up defensive positions at intervals along the highway to cover the retreat.
Rebel fighters launched off a salvo of Grad rockets from Ajdabiya's Eastern outskirts as dozens of cars and military vehicles poured out of the town heading East towards Benghazi.
A military helicopter with the rebel flag painted on its side later flew very low towards the front line around Ajdabiya despite a UN-imposed no-fly zone, an AFP correspondent reported.
On Thursday, a Nato air strike hit rebel tanks West of Ajdabiya, killing two rebel fighters and two medics in the second friendly fire incident in a week.
Earlier, two captured Gaddafi loyalists had been brought back from the front. Excited rebel fighters chanting: "Allahu Akhbar (God is greater)," gathered round taking photographs with their mobile telephones.
One of the pro-government fighters was seated in the back of a four-wheel-drive and seemed in good health.
But the other, who was lain in the back of pickup truck, had blood all over his arm and appeared quite badly wounded. He covered his face with his hands as the convoy pulled up.
European Union foreign ministers will meet a member of the Transitional National Council next week, despite a lack of consensus in the bloc on how to deal with the opposition group.
EU foreign policy chief Catherine Ashton issued the invitation on Tuesday to the meeting in Luxembourg, which will be the first between the Libyan Opposition and the EU as a whole.
A group of African leaders will visit Libya this weekend and meet with both sides in the country's deepening conflict to demand an immediate ceasefire.
South African President Jacob Zuma and other leaders from a high-level African Union panel will first hold talks in Mauritania on Saturday, then travel to Libya to meet Gaddafi in Tripoli and rebel leaders in Benghazi.
Italy will decide next week whether to join in shelling Gaddafi's troops, but was likely to remain in a supporting role, defence minister Ignazio La Russa said.
"Italy will decide in the middle of next week whether to participate in the bombardments, after I have met with the British and French defence ministers," La Russa said in an interview with La Repubblica daily.
La Russa said he would meet France's Gerard Longuet and Britain's Liam Fox informally on Monday or Tuesday "to see what they would like Italy to do".
Meanwhile, a debate raged over how well Nato air forces are enforcing a UN-mandated no-fly zone.
Criticism of the role of Nato Air Forces, who are charged by the UN Security Council with protecting the civilian population, was growing with rebels in Misrata slamming Nato for what they said was its lack of response to a relentless pounding by Gaddafi forces for more than a month.
Nato was already facing criticism by the opposition after its warplanes hit rebel tanks two days ago near Brega, killing four people, wounding 14 and leaving six others missing.
Anders Fogh Rasmussen, the military alliance's chief, on Friday called the bombing an "unfortunate incident".
"I strongly regret the loss of life," Rasmussen said of the strike, labelled by rebel military commander general Abdelfatah Yunis as a Nato "error."
The operation's deputy commander, British Rear Admiral Russell Harding, had refused to apologise, saying Nato was unaware rebels were using tanks and that it was becoming hard to distinguish between the two sides on the road.
The rebels said they were "not seeking an apology but an explanation."
"We are not questioning the intention of the Nato," rebel spokesman Shamsiddin Abdulmolah told AFP.
"It appears that there has been a breakdown of communication, perhaps due to the visibility on the ground. And that the positions of our tanks have not been made clear to the Nato," he said.
In Benghazi, around 400 protesters chanted "Down with Nato" in reaction to the Brega bombing.