Anti-Gaddafi forces have been forced to pull back from the town of Bani Walid after meeting fierce resistance from those loyal to the ousted Libyan leader.
The BBC reports fighters came under heavy shelling and gunfire after entering the town, 140 kilometres south-east of the capital Tripoli.
Further to the east, forces are continuing an assault on Sirte, another remaining Gaddafi stronghold.
Earlier, the United Nations voted to give Libya's seat to the transitional authorities.
The assembly voted 114 to 17, with 15 abstentions. The motion was opposed by Latin American governments and some African nations called for a decision to be postponed.
The move clears the way for National Transitional Council chief Mustafa Abdul Jalil to attend the UN General Assembly in New York next week.
The UN also passed a resolution to ease sanctions against Libya, including on its national oil company and national bank.
British Foreign Secretary William Hague said about $US19 billion in Libyan assets frozen in the UK would be gradually released as a result.