By Yoko Kubota

  TOKYO (Reuters) - Japan's unpopular Prime Minister Naoto Kan on Monday refused to step down after the resignation of his foreign minister over a political funding scandal that has added to pressure on him to quit or call a snap election.

  But it is far from clear how Kan, if he does manage to cling to office, will be able to resolve the political stalemate that has left the government struggling to implement policies to cut into a huge public debt and win approval from a divided parliament to enact a new budget from April.

  " Carrying out the administration's duty for the four-year term and then letting the people decide at the ballot box is best for the people themselves," he told a parliamentary session.

  " I intend to firmly fulfil my duty until that time comes."

  But some analysts warned that Kan's government may well collapse sooner than later. He is Japan's fifth leader since 2006 and has no clear successor in sight.

  The resignation of Seiji Maehara, a security hawk and critic of China's military buildup, removes a strong contender to replace Kan and has deepened the impression of a government in disarray, unable to resolve deep problems facing the world's third largest economy.

  The stalemate is blocking passage of budget bills to implement a $1 trillion (615 billion pounds) budget for the year from April and keeping the government from tackling tax reforms to curb massive public debt, already twice the size of the $5 trillion economy.

  Kan has made fiscal reforms including a rise in the 5 percent sales tax a priority as a way to fund the social costs of a fast ageing society. But he has failed to get opposition parties to join in talks on the topic.

  Chief Cabinet Secretary Yukio Edano will serve temporarily as foreign minister while Kan picks a successor, who will have a full plate managing strained ties with China and Russia and keeping relations with ally Washington on an even keel.

  " LACK OF GOVERNING ABILITY"

  Kan's health minister, Ritsuo Hosokawa, is also under fire for messy handling of measures to help housewives who had mistakenly failed to pay their pension premiums, and media warned more cabinet ministers could quit in a " domino effect."

  Kan faces pressure from within his own fractious Democratic Party of Japan (DPJ) to step down, while opposition parties are pushing him to call a snap election in the powerful lower house.

  " This has revealed the Kan administration's lack of governing ability, and the only ways to break through this situation are for the cabinet to resign as soon as possible or for a snap election to be called," Kenji Kosaka, a lawmaker in the main opposition Liberal Democratic Party (LDP), told reporters.

  Jiji news agency quoted an LDP executive as saying the main opposition party could submit a censure motion against the prime minister this month.

  A Yomiuri newspaper poll released on Monday showed that 51 percent of voters wanted Kan to resign, with 56 percent saying they'd blame the government and DPJ if bills needed to enact a $1 trillion budget for the year from April are not passed on time.

  The 2011/12 budget itself can be enacted by parliament's lower house alone. But related bills to implement it require approval of the upper chamber, where the opposition have threatened to use their majority to block legislation.

  Some analysts said Kan may hang on to office in the hope that public opinion will eventually force opposition parties to compromise, some analysts said.

  " In order to quit, he would need to accomplish something by doing so. But there is no prospect that the budget bills would pass if he resigned," said Keio University professor Yasunori Sone. " So even if his administration is falling apart, he must hang on ... He cannot even call an election."

  Others said Kan might step down in return for opposition help passing the budget and a promise to call an early election.

  The DPJ could fall from power if an election were held soon but the problem of the divided parliament would likely remain since no single party would have a majority in both chambers no matter who wins.

  Maehara admitted accepting 250,000 yen (1,847 pounds) in political donations between 2005-2010 from a Korean resident in Japan. Taking political donations from foreign nationals is illegal if done intentionally.

  (Additional reporting by Linda Sieg, Antoni Slodkowski and Shinichi Saoshiro, editing by Jonathan Thatcher.)

* FTSE 100 index jumps 0.8 percent, back above 6,000

  * Banks higher, led by HSBC up on headquarters shift talk

  * Energy issues up as brokers upgrade on higher crude price

 

  LONDON, March 7 (Reuters) - Strength in banks and commodity stocks pulled Britain's leading share index higher by midday on Monday, as investors focused on fundamentals and shook off fears about the impact of high oil prices on the global economy.

  At 1206 GMT, the FTSE 100 index was up 45.53 points, or 0.8 percent, at 6,035.92, having shed 0.2 percent on Friday.

  " We have seen investors come in to buy stocks after a somewhat aggressive sell off in later trading in Friday," said Joshua Raymond, market strategist at City Index.

  " (However) The FTSE needs to break through current resistance between 6,040-6,050 before the UK Index can target the 6,100 level again," Raymond added.

  Banks were the best sector performers thanks to strong gains from global heavyweight HSBC, up 1.8 percent.

  HSBC may move its headquarters from London to Hong Kong because of what it sees as high levels of tax and red tape in the UK, the Sunday Telegraph said.

  Part-nationalised Lloyds Banking Group, however, shed 0.1 percent, unsettled by a report in The Guardian which said the Liberal Democrats backbench Treasury Committee has backed a radical plan to distribute the government-owned shares in both Lloyds and Royal Bank of Scotland to the public.

  " Aesthetically it all sounds great, but is wholly impractical," said David Buik, senior partner at BGC Partners.

  Energy issues also gave the blue chips a boost, led by BP up 1.7 percent, helped by a batch of brokers raising estimates across the sector based on higher oil prices.

  Brent crude jumped to $118 a barrel on Monday as Libyan leader Muammar Gaddafi attacked rebel-held towns, stoking fears of an imminent civil war in the country.

  Precious metal miners benefited as gold rose to near record highs, and silver jumped to its highest level in more than three decades on safe-haven buying on the unrest in Libya, with Mexican silver miner Fresnillo up 2.5 percent.

 

  WALL STREET EYED

  U.S stock index futures, were higher, signalling a recovery on Wall Street after big falls on Friday, with some takeover activity helping sentiment.

  Luxury goods firms got a boost after France's LVMH launched a 3.7 billion euro takeover bid for Italy's Bulgari, paying a premium of almost 60 percent.

  Burberry was in demand on the news, up 3.5 percent.

  Among individual stocks, Intertek was the top blue-chip gainer, up 4.5 percent as the testing firm posted an 11 percent rise in full-year profit and said it would acquire safety services provider Moody.

  Inmarsat was by far the biggest FTSE 100 faller, shedding 10.6 percent to touch its lowest since late 2009, as the satellite operator's results were below market expectations and it signalled a difficult 2011.

  Rolls-Royce slipped 0.2 percent after the engineer confirmed it is talks with German automotive group Daimler to make a joint bid for heavy diesel engine maker Tognum. (Editing by Hans Peters)

HONG KONG, March 7 (Reuters) - Hong Kong stocks finished lower on Monday as rising energy costs prompted concern over the impact to margins for the transport sector, particularly airlines, but higher oil prices lifted energy counters.

  The Hang Seng Index < .HSI> ended down 0.41 percent at 23,313.19 The China Enterprises Index < .HSCE> eased 0.23 percent as a rally in coal issues helped H shares outperform the broader market.

  The Shanghai Composite Index < .SSEC> rose 1.83 percent to a near four-month high.

  HIGHLIGHTS:

  * Energy plays were higher, with coal counters taking their lead from oil producers. China Shenhua Enrgy Co Ltd < 1088.HK> , the top gainer on the Hang Seng Index and the benchmark's most active component, gained 3.2 percent. It received a further lift from talk about the company being shortlisted to develop a coal field in Mongolia, traders said.

  * Airline counters bore the brunt of higher oil prices on the day as investors took a cautious view on profitability for the sector. Cathay Pacific Airways Ltd < 0293.HK> slumped 3.5 percent and led a broad decline for the sector. Cathay results scheduled for March 9 will be closely watched for any forecasts on the impact of higher oil prices on the company's margins.

  * Extended trading hours in Hong Kong did little to boost trading volumes on the Hong Kong stock exchange with Monday's overall turnover dropping about 10 percent from last week's average. The fall in turnover also suggested that investors were cutting back on risk rather than rushing for the exits, encouraged in part by a resilient Shanghai market.

  DAY AHEAD:

  Fubon Bank (Hong Kong) Ltd < 0636.HK> , which will be taken private by its Taiwanese parent Fubon Financial Holding Co Ltd < 2881.TW> is expected to report earnings results. (Editing by Chris Lewis) (vikram.subhedar@thomsonreuters.com +852 2843 6975 Reuters Messaging: vikram.subhedar.reuters.com@reuters.net))

HONG KONG, March 7 (Reuters) - China's main stock index closed up 1.8 percent on Monday, at its highest level in nearly four months, as energy companies surged on soaring crude oil prices.

  The benchmark Shanghai Composite Index ended at 2,996.2 points, after a 1.7 percent gain on Friday, with trading volume at its highest in nearly four months.

  Oil producer PetroChina Co Ltd, China's largest listed company by market capitalisation, closed up 2.6 percent, and the country's largest coal producer, China Shenhua Energy Co Ltd, ended up 10 percent in its largest daily trading volume since April 2009. (Reporting by Emma Ashburn Editing by Jacqueline Wong)

By Chuck Mikolajczak

  NEW YORK, March 7 (Reuters) - U.S. stock index futures rose on Monday, indicating Wall Street will recover from Friday's losses even as oil prices continued to spike on unrest in the Middle East and North Africa.

  * Brent crude rose 1.6 percent to $117.84 a barrel and U.S. oil futures were up 2 percent to $106.43 as fighting in Libya disrupted the nation's oil supplies and on renewed concerns of wider disruptions in the region.

  * Government troops seeking to dislodge rebels from Libya's coast advanced on an oil town amid accelerating humanitarian efforts to prevent civilian suffering from worsening and a mass refugee exodus.

  * OPEC is assessing the oil market to determine whether it should hold an extraordinary meeting, Qatar's Energy Minister said. But he added there was no supply shortage in the market.

  * In major oil producer Saudi Arabia, security forces detained at least 22 minority Shi'ite Muslims who protested last week over what they said was discrimination, according to activists.

  * S& P 500 futures gained 5.2 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 40 points, and Nasdaq 100 futures climbed 14 points.

  * Citigroup raised its price forecasts for Brent and West Texas intermediate crude for 2011 and 2012, in part citing a " fear premium" on threats of continued output disruptions.

  * In mergers-and-acquisition news, the London Stock Exchange is eyeing a takeover of U.S. rival Nasdaq OMX Group Inc, just weeks after the London bourse announced a merger with the Toronto stock exchange, the Sunday Times reported.

  * European equities edged higher, with Alcatel-Lucent SA leading technology shares higher after a brokerage upgrade, but strong oil prices limited market gains and caused Asian stocks to decline.

  * Wall Street erased most of its weekly gains on Friday as fears of more geopolitical turmoil and higher oil prices threaten to stifle rallies in coming weeks.

By Mohammed Abbas

  RAS LANUF, Libya (Reuters) - Government forces seeking to dislodge rebels from Libya's strategically important coast struck at an oil town on Monday amid quickening efforts to prevent more humanitarian suffering and a mass refugee exodus.

  Offering a potential olive branch to rebels seeking to end Muammar Gaddafi's long rule, one of his associates appealed to opposition chiefs for dialogue, in a sign the ageing autocrat may be ready to compromise with the unprecedented revolt.

  The offer, rapidly dismissed by rebels, coincided with a renewed publicity drive by Gaddafi that warned European nations to the north of the Mediterranean that if he fell " you will have immigration, thousands of people from Libya will invade Europe."

  A warplane launched an air strike on the eastern outskirts of the rebel-held oil terminal town of Ras Lanuf 600 km (400 miles) east of the capital Tripoli on Monday, witnesses said.

  " There was an aircraft, it fired two rockets there were no deaths," Mokhtar Dobrug, a rebel fighter who witnessed the strike, told Reuters. The attack took place at one of two checkpoints in the city.

  The attack fitted the pattern of much of the recent fighting, which has been desultory and erratic, with small groups engaging each other, guerrilla-style, in hit and run raids. Air attacks have been fitful and the bombing often inaccurate.

  In some areas, advantage on the ground has swung back and forth without conclusive result.

  But the resilience of Gaddafi's troops in the face of protests which started in mid-February and their ability to launch a counter-attack on a key coastal road has raised the prospect that the country is heading for months of bloodshed.

  " It's clear the government feels a sense of momentum on its side," said military analyst Shashank Joshi, an associate fellow at Britain's Royal United Services Institute.

  " Government forces have more mobility than the rebels thanks to airlift and a decent amount of road transport.

  " That's blunted by the fact that we are seeing extremely poor fighting skills by government forces, and reasonably competent fighting by the rebels."

  The United Nations and the European Union are dispatching fact-finding missions to the north African nation, where reports by residents of attacks on civilians by security forces have triggered a war crimes probe and provoked global outrage.

  Tens of thousands have fled the violence in Libya and crossed the border to Tunisia since the uprising prompted a violent crackdown by security forces.

  The rebels have called for U.N.-backed air strikes against what they say are African soldiers-for-hire used by Gaddafi to crush the uprising against his 41-year-old incumbency.

  The government says it is fighting against al Qaeda terrorists and maintains that its security forces have targeted only armed individuals attacking state institutions and depots.

  Witnesses said government forces advanced on the rebel-held oil port of Ras Lanuf in a counter-attack that forced residents to flee and rebels to hide their weapons in the desert.

  " READY TO DIE"

  In Ras Lanuf, one angry man told rebels to go home, arguing that they were bringing fighting closer to oil terminals.

  Another complained of the rebels' inexperience, as one opposition fighter lay on his back and fired an automatic weapon gun at a government warplane flying overhead. He said:

  " I believe these youths are ready to die, but they won't make a difference. Look at the way they're firing at the plane. They have no experience, no leadership and no strategy."

  The army was moving down the strategic Mediterranean coastal road east of the recaptured town of Bin Jawad, heading towards Ras Lanuf which is about 60 km (40 miles) away and which has a major oil complex, witnesses told Reuters.

  Residents of Ras Lanuf, fearing assault by army forces, were leaving in cars laden with belongings on Monday and rebels said they had moved weapons into the desert for safekeeping.

  APPEAL LAUNCHED

  As the rival combatants prepared to resume battle, the authorities launched an appeal to the rebels in the east for dialogue, in the clearest overture yet to their opponents.

  Jadallah Azous Al-Talhi, a Libyan prime minister in the 1980s who is originally from eastern Libya, appeared on state television reading an address to elders in Benghazi.

  He asked them to " give a chance to national dialogue to resolve this crisis, to help stop the bloodshed, and not give a chance to foreigners to come and capture our country again."

  Ahmed Jabreel, an aide to rebel leader Mustafa Abdel Jalil, said: " Any negotiations must be on the basis that Gaddafi will step down. There can be no other compromise."

  In an interview with the France 24 television station, Gaddafi said Libya was an important partner for the West in containing al Qaeda and illegal migrants trying to reach Europe,

  " There are millions of blacks who could come to the Mediterranean to cross to France and Italy, and Libya plays a role in security in the Mediterranean," he said.

  In the West, after what residents said was fierce fighting on Sunday with artillery, rockets and mortar bombs, rebel forces announced they had fought off Gaddafi's forces in the towns of Zawiyah, to the immediate west of Tripoli, and Misrata to the east.

  As the conflict escalated in Libya, U.S. crude oil rose to a 2-1/2-year high on Monday.

  U.S. crude for April rose as much as $1.90 to $106.32 a barrel, the highest price since September 2008, heightening concerns that high energy prices may derail the global economic recovery. The U.S. government reiterated that it could tap its strategic oil reserves to safeguard economic growth.

  SIRTE REINFORCED

  British Foreign Secretary William Hague said on Sunday that what he called a UK diplomatic team that had been seized in the eastern city of Benghazi had now left Libya.

  The Sunday Times earlier reported a British Special Air Service (SAS) unit had been captured during a secret diplomatic mission to make contact with opposition leaders backfired.

  RUSI analyst Joshi said the episode might offer a propaganda boost for Gaddafi, who was likely to portray it as evidence that the revolt was foreign-inspired rather than indigenous.

  (Additional reporting by Michael Georgy in Tripoli, Alexander Dziadosz in Ajdabiya, Mohammed Abbas in Ras Lanuf, Stefano Ambrogi in London, Nick Vinocur in Paris and Tom Pfeiffer in Benghazi Writing by William Maclean editing by Giles Elgood)

By Tom Pfeiffer and Stefano Ambrogi

  BENGHAZI, Libya/LONDON (Reuters) - Rebels in eastern Libya have captured members of a British special forces team but the issue will be resolved shortly, rebel sources said on Sunday.

  The Special Air Service (SAS) unit was on a secret diplomatic mission to make contact with opposition leaders involved in the struggle against Muammar Gaddafi's government, the Sunday Times reported earlier.

  The British government declined to comment on the affair. But a Libyan human rights activist with links to the rebels told Reuters that Britain was negotiating to secure their release.

  " They (the rebel army) did capture some British special forces. They could not ascertain if they were friends or foes. For our safety we are holding them and we expect this situation to be resolved soon," said the rebel source in Benghazi.

  " They are safe and in good hands. We do not know why they (British government) did not get in touch first or (detail) the purpose of their mission," he told Reuters.

  Another rebel source said the group, numbering eight people carrying British diplomatic passports, were arrested about 30 km from Benghazi.

  " We think this issue will be settled very swiftly," he said.

  British Defence Secretary Liam Fox said a British diplomatic team was in Benghazi but he declined to comment on whether special forces had been captured.

  " I can confirm that a small British diplomatic team is in Benghazi. We are in touch with them, but it would be inappropriate for me to comment further on that for reasons I'm quite sure you understand," Fox told the BBC.

  The Geneva-based Human Rights Solidarity group, which employs a number of Libyan exiles, told Reuters a team of eight special forces personnel had been seized by rebels about 10 km (6.25 miles) from Benina airport, which serves Benghazi.

  An activist with the group, Jiumma Elomami, said " they are under arrest but we have information that the British authorities are now negotiating with the new opposition council to negotiate their release."

  He said it was not clear whether British officials had also been arrested alongside the troops, whose regiment has seen service in Iraq and Afghanistan and has a special place in British military folklore.

  Earlier, rebel sources expressed puzzlement about the mission.

  " If this is an official delegation, why come with helicopters? Why not say 'we are coming, permission to land at the airport?' There are rules for these things," one said.

  The Sunday Times said the team were intercepted as they escorted a junior diplomat through rebel-held territory. He was preparing the way for a visit by a senior colleague to try to establish diplomatic contact with the rebels, it said.

  Britain has taken a strong stance against Gaddafi and wants to work with rebel groups to help oust him from power. But Gaddafi's opponents fear he could use any evidence of Western military intervention to rally support.

  " It is a very difficult situation. There are a number of different opposition groups to Colonel Gaddafi in Libya. They do seem relatively disparate," Fox said.

  " We want to clearly understand what the dynamic is there because we want to be able to work with them to ensure the demise of the Gaddafi regime, to see a transition to greater stability in Libya and ultimately to more representative government," he said.

  Fox ruled out the use of British military ground forces in Libya but said a no-fly zone remained a possibility. NATO defence ministers meeting in Brussels on March 10-11 would examine no-fly zone options.

  (Additional reporting Adrian Croft and Keith Weir, Writing by Edmund Blair in Cairo, Editing by Angus MacSwan)

  2011-03-06 23:44:28

* 2015 deadline for getting deficit under control

  * Govt to have economic council to decide policy

  * Michael Noonan to be new finance minister - source

  * New government will meet for the first time on Wed

  (Recasts with confirmation, quotes)

  By Carmel Crimmins and Padraic Halpin

  DUBLIN, March 6 (Reuters) - Ireland's new government will stick to the budget targets laid down in an 85 billion euro EU/IMF rescue package as it seeks to win European partners round to giving it easier terms on the loans.

  Ireland's prime minister in-waiting Enda Kenny is under huge pressure to persuade Europe's paymaster Germany to cut the interest rate Brussels is charging and give Dublin more time to restructure its banks before a Europe-wide deal on the debt crisis is hammered out at summit on March 24-25.

  The coalition agreement between Kenny's centre-right Fine Gael party and the centre-left Labour party, clinched shortly after midnight, seems designed to curry favour with the fiscally conservative Germans and draws a veil over some of the anti-EU rhetoric deployed in the election campaign.

  " We have to repair broken bridges across our European partner to build up an understanding of our position," Brendan Howlin, one of the chief negotiators for the Labour party, told state broadcaster RTE.

  " It is in everybody's interest, not only the national interest of Ireland, but in Europe's interest and in the interests of the maintenance of the euro that we have a path that is sustainable out of the economic hole that we find ourselves now in."

  Fine Gael, which will lead the new government, has persuaded Labour to drop its demand that Ireland be given an extra year to get its budget deficit under control and is aiming for the bulk of the adjustment to be achieved through spending cuts.

  The new government will aim to shrink the shortfall from nearly 12 percent of Gross Domestic Product (GDP) currently to below an EU limit of 3 percent by 2015, a deadline already okayed by Brussels last year amid concerns spluttering growth would prevent Dublin meeting an original target date of 2014.

  There will be a new cabinet position to deal with public spending and public sector reform and the holder of this office, along with the finance minister and a minister from each of the two parties will sit on an newly-formed economic council.

  " This is a new structure of cabinet ... economic policy will be determined by this council," said Howlin.

  A source told Reuters that Fine Gael's finance spokesman, Michael Noonan, would be the administration's finance minister.

  The source also said Labour's Pat Rabbitte would likely get the new ministerial post dealing with the public sector.

  Analysts said investors would welcome Noonan's appointment given Fine Gael's pro-business, low-tax credentials and said the policy agreement was broadly expected.

  " I wouldn't see anything there that would scare the markets, scare Europe, scare the IMF or change anything very substantially going forward," said Eoin Fahy, chief economist, Kleinwort Benson Investors.

  " The fact that there will be a Fine Gael finance minister will be taken positively and should be because the ministry has a very large control over the small items, and not necessarily just the big picture macro stuff.

  VERY SHORT HONEYMOON

  Kenny, a former primary school teacher whose only previous government experience was as minister for tourism and trade in the 1990s, has less than 3 weeks to persuade European partners to relax the terms of their 40 billion euro plus worth of loans.

  Kenny fears the deal will bankrupt the former " Celtic Tiger" economy but his pleas got a cool response from fellow European centre-right leaders at a summit in Helsinki last week, where he was told that there would be " no free lunches" .

  A statement from the summit did point to a " periodical re-evaluation" of EU and international assistance holding out some hope for Ireland.

  But there are fears in Dublin that any concession will require something in return with the country's low rate of corporation tax a likely battleground.

  Kenny's coalition agreement with Labour party leader Eamon Gilmore does however strike the right notes for Europe.

  There will be no new taxes on work and Dublin is targeting 2 billion euros from the sale of non-strategic state assets.

  The two parties have compromised on job cuts in the public sector with some 25,000 positions set to be culled, roughly midway point between the 18,000 targeted by Labour and the 30,000 eyed by Fine Gael.

  The fiscal deadline, the emphasis on cutbacks and the number of public sector jobs set for the chop all chime with the four-year austerity plan published by the outgoing government, and endorsed by the EU and the IMF, late last year.

  The similarities with the policies of such an unpopular administration, which was roundly routed in the election for its handling of the economic crisis, were inevitable given the straitjacket imposed by the bailout but they will not prove popular with voters who were seeking change.

  Labour party members, in particular, will be aggrieved that the leadership has given ground on job cuts.

  " I suspect that when people see the reality of a programme for government that they will inevitably be disappointed," said Eoin O'Malley, a lecturer at Dublin City University.

  " You can be almost guaranteed that there will be a very, very short honeymoon period for the new government."

  The coalition deal will be formally approved by the two parties later on Sunday. The new government will meet for the first time on Wednesday when parliament is recalled. ($1=.7148 Euro) (Editing by Jon Loades-Carter)

By Maria Golovnina and Michael Georgy

  TRIPOLI (Reuters) - Libyan troops loyal to Muammar Gaddafi launched counter-offensives against three rebel-held towns on Sunday as the popular uprising escalated into open warfare.

  The resilience of Gaddafi's forces in the face of the widespread insurrection and their ability to counter-attack will increase fears that Libya is heading for a protracted civil war rather than the swift revolutions seen in Tunisia and Egypt.

  Gaddafi's troops, backed by tanks, artillery, warplanes and helicopters attacked the towns of Zawiyah and Misrata, to the immediate west and east of Tripoli, and positions near the oil port city of Ras Lanuf, 660 km (410 miles) east of the capital.

  Government spokesmen said Gaddafi's forces won a series of swift victories, but while there was fierce fighting in places, many of the towns remained in rebel hands, Reuters reporters at the scene and witnesses said.

  Gaddafi loyalists were nevertheless jubilant over the reports and poured into the streets at daybreak and fired automatic weapons into the air.

  " These are celebrations because government forces have taken control of all areas to Benghazi and are in the process of taking control of Benghazi," spokesman Mussa Ibrahim said, referring to Libya's second city, situated in the far east.

  While Benghazi remained firmly in rebel hands, government troops pushed the insurgents out of the town of Bin Jawad which they had captured on Saturday, back to Ras Lanuf.

  But the rebels regrouped and moved back to the outskirts of Bin Jawad, a small, dusty town sandwiched between the coastal highway and the Mediterranean Sea, 160 km (100 miles) east of Gaddafi's hometown of Sirte.

  One fighter returning wounded to Ras Lanuf from the government assault on Bin Jawad was asked what he had seen.

  " Death," he replied, too distraught to say any more.

  Rebels surrounded by Gaddafi troops near the centre of Zawiyah, 50 km (30 miles) west of Tripoli, faced another onslaught on Sunday after repelling two major assaults by tanks and infantry the day before.

  " This morning, there was a new attack, bigger than yesterday. There were one and a half hours of fighting ... Two people were killed from our side and many more injured," spokesman Youssef Shagan said by telephone.

  " We are still in full control of the square," he added.

  FIGHT BACK

  Elite forces under Gaddafi's son Khamis also launched an assault on Misrata, 200 km (125 miles) east of the capital.

  " Very, very heavy fighting is taking place now at the western entrance of the town. The fighting started about an hour ago after an attack by brigades belonging to Khamis," said the resident, called Mohamed.

  " They are destroying everything they find. They are using artillery and tanks. Revolutionaries are doing their best to prevent them from reaching the centre of the town," he said.

  Rebels first took Bin Jawad on Saturday but later withdrew. Army units then occupied local homes and set up sniper and rocket-propelled grenade positions for an ambush.

  " It's real fierce fighting, like Vietnam," rebel fighter Ali Othman told Reuters. " Every kind of weapon is being used. We've retreated from an ambush and we are going to regroup."

  Later, a steady stream of rebels heading back west towards Bin Jawad was met by mortar and heavy machinegun fire from government forces in the town.

  The rebels said they had shot down a helicopter on Sunday and a Reuters correspondent was shown the wreckage of a warplane on Saturday that rebels said they had brought down.

  Doctors at Ras Lanuf hospital said two dead and 22 wounded had arrived from the fighting. A French journalist was shot in the leg, a doctor said, and four rebels were seriously wounded and unlikely to survive.

  BRITISH TROOPS SEIZED

  Rebels in Benghazi captured members of the British special forces 30 km from the city, but said authorities were treating them well and hoped to resolve the issue shortly.

  The Sunday Times earlier reported a British Special Air Service (SAS) unit had been captured after a secret diplomatic mission to make contact with opposition leaders backfired.

  " They (the rebel army) did capture some British special forces. They could not ascertain if they were friends or foes. For our safety we are holding them and we expect this situation to be resolved soon," a rebel source in Benghazi said.

  " I can confirm that a small British diplomatic team is in Benghazi. We are in touch with them, but it would be inappropriate for me to comment further," British Defence Secretary Liam Fox told the BBC.

  But the insurgents were puzzled by the way the mission was carried out.

  " If this is an official delegation, why come with helicopters? Why not say 'we are coming, permission to land at the airport?' There are rules for these things," one rebel source said.

  Western leaders have denounced what they call Gaddafi's brutal response to the uprising, and the International Criminal Court said he and his inner circle face investigation for alleged targeting of civilians by his security forces.

  The International Energy Agency said the revolt had blocked about 60 percent of Libya's 1.6 million bpd (barrels per day) oil output. The drop, due largely to the flight of thousands of foreign oil workers, will batter the economy and have already jacked up crude prices abroad.

  (Additional reporting by Michael Georgy in Tripoli, Alexander Dziadosz in Ajdabiya, Mohammed Abbas in Bin Jawad, Stefano Ambrogi in London, Nick Vinocur in Paris and Tom Pfeiffer in Benghazi Writing by Mark Heinrich and Jon Hemming Editing by Michael Roddy)

ROAD TO BIN JAWAD, Libya (Reuters) - Rebels in east Libya regrouped on Sunday and advanced on Bin Jawad after forces loyal to Muammar Gaddafi ambushed rebel fighters and ejected them from the town earlier in the day.

  " We are just outside Bin Jawad. There are thuds of mortars landing near rebel positions, leaving puffs of smoke, and also the sound of heavy machineguns in the distance," Reuters correspondent Mohammed Abbas said by telephone.

  " There's a steady stream of rebels heading back west towards Bin Jawad," he said. The town is on the road to Gaddafi's hometown of Sirte, which he rebels intend to attack.

  Rebels captured Bin Jawad, 160 km (100 miles) from Sirte, on Saturday but withdrew, which let army units occupy houses and mount an ambush that forced rebels back to Ras Lanuf.

  One fighter, returning wounded from Bin Jawad to rebel-held Ras Lanuf further east, said Gaddafi loyalists had ambushed advancing rebels with machineguns and rocket-propelled grenades.

  Asked what he had seen, he replied: " Death." Distraught and bandaged, he would not say any more.

  In the rebel-held city of Benghazi, a source in the rebel movement said rebels had captured " some British special forces" who were " safe and in good hands." Earlier, Britain's defence minister said a UK diplomatic team was in Benghazi.

  " It's real fierce fighting, like Vietnam," rebel fighter Ali Othman told Reuters of the earlier ambush at Bin Jawad. " Every kind of weapon is being used. We've retreated from an ambush and we are going to regroup."

  " Gaddafi's forces attacked with aircraft and shot from on top of the houses," said Ibrahim Boudabbous, a fighter who took part in the rebel advance.

  Doctors and other staff at Ras Lanuf hospital said two dead and 22 injured had arrived from fighting in Bin Jawad. Witnesses said there were many dead and wounded who could not be reached because of the fighting, including civilians.

  " SHOUTING AND SCREAMING"

  One man said he had seen a civilian building hit by a bomb.

  " The wounded people shouted at us to get their children out. We left the dead," said Khaled Abdul Karim, a rebel fighter.

  " I saw civilians shouting and screaming. They had been pushed out of their homes. I saw about 20 to 25 people who looked dead, they were civilians or rebels," said Ashraf Youssef, a rebel fighter.

  Some rebels said the people of Bin Jawad had sided with Gaddafi's forces. " There has been treachery. I saw people in civilian clothes firing on us," said Ibrahim Rugrug, a rebel fighter. His comments were echoed by others.

  But some in the group criticised Rugrug's accounts, saying: " They are our brothers. They were forced by Gaddafi."

  Rebels said they had shot down a helicopter. Three fighters told Reuters they had seen it falling into the sea, but no details were available.

  On the road that leads from the coastal highway to Ras Lanuf, a poster showed a bloody body with gaping wounds, saying in English: " Bare chests versus aircrafts." Rebels have called for a " no-fly" zone to protect them from Gaddafi's planes.

  Dozens of rebel vehicles armed with heavy machineguns arrived in Ras Lanuf after the ambush and regrouped.

  The government said on Sunday it had driven the rebels, who took over eastern Libya over a week ago, all the way back to their eastern stronghold of Benghazi.

  " THEY'RE ALL REBELS HERE"

  But the rebels were still clearly in control of Benghazi and the key oil complex of Ras Lanuf, which they took on Friday night. " They're all rebels here," a witness in Ras Lanuf said. A warplane struck Ras Lanuf on Sunday but no one was hurt.

  Britain has a diplomatic team in the city of Benghazi, Defence Secretary Liam Fox said. He declined to comment on a report Libyan rebels had captured a British special forces unit on a mission to contact opposition leaders.

  One rebel commander said earlier his forces had pushed west from Bin Jawad and controlled the town of al-Nawfaliyah, 120 km (75 miles) from Sirte, where they would await a call from citizens in Sirte before advancing. There were differing accounts of whether al-Nawfaliyah was still rebel-held.

  " It's not difficult to take Sirte," Colonel Bashir Abdul Gadir told Reuters. " I think 70 percent of regular people are with us there, but they have asked us not to go into Sirte fearing heavy battles. We're going to wait till they call us to let us know when they are ready."

  The colonel, speaking in Ras Lanuf, said there were about 8,000 rebel soldiers between Ras Lanuf and al-Nawfaliyah and Gaddafi's forces were reinforcing the Libyan leader's hometown of Sirte, further west down the coast, from the south.

  " We have our brothers in Sirte and they won't accept this situation. They know he is a killer and stole our money and they are going to be with us," Abdul Gadir said, denying government statements that it controls Ras Lanuf.

  In Libya's eastern second city of Benghazi, where the uprising began, Colonel Lamine Abdelwahab, a member of the rebel military council for the Benghazi area, said:

  " We have received contact from members of the Gaddafda tribe (Gaddafi's tribe) in Sirte who want to negotiate ... There will be no negotiations. They are asking us what we want. We say we don't want Gaddafi (in power)."

  Abdelwahab said soldiers belonging to the Ferjan tribes were executed for refusing to fight rebels. " They (the Ferjan tribe in Sirte) are joining the rebellion because of this atrocity. The problem is that they are unarmed. Only the Gaddafda were armed by the regime."

  Gaddafi may have more than 20,000 fighters in Sirte, he said, adding that the city houses the Saadi (son of Gaddafi) battalion which includes four brigades, in addition to his armed tribe members.

  (Additional reporting by Tom Pfeiffer in Benghazi and Alex Dziadosz in Ras Lanuf Writing by Peter Millership editing by Andrew Roche)