The United States has recognised the Libyan opposition as the country's legitimate governing authority.
The decision was announced by US Secretary of State Hillary Clinton at a diplomatic meeting in Istanbul.
''The United States views the Gaddafi regime as no longer having any legitimate authority in Libya,'' Mrs Clinton said.
''So I am announcing today that, until an interim authority is in place, the United States will recognise the Transitional National Council as the legitimate governing authority for Libya, and we will deal with it on that basis.''
The BBC reports Western and Arab members of the Libya contact group are drawing up a plan to end hostilities, which will be presented to Colonel Muammar Gaddafi.
Italy's Foreign Minister Franco Frattini said the decision left Colonel Gaddafi "no other option" but to leave power.
''This political package is a political offer, including a ceasefire,'' he said.
The BBC reports the conflict in Libya appears to be in a protracted stalemate. After five months of fighting, the rebels are holding eastern Libya and pockets in the west.
Colonel Gaddafi remains entrenched in the capital Tripoli, despite a NATO bombing campaign.
Colonel Gaddafi has been in power for 42 years. The uprising, inspired by events in neighbouring Tunisia and Egypt, began in February.
