By Mohammed Abbas
TOBRUK, Libya (Reuters) - Muammar Gaddafi's tanks and artillery struck a rebel-held town and other loyalist forces advanced on Libya's main rebel bastion of Benghazi on Wednesday as diplomatic efforts to stop him appeared to lose momentum.
Italy, a potential base for a no-fly zone proposed by Britain and France, ruled out military intervention in the oil-exporting country to support an increasingly vulnerable-looking rebellion against Gaddafi's 41-year-old rule.
"We cannot have war, the international community should not, does not want and cannot do it," Foreign Minister Franco Frattini said in Rome.
As the Libyan army told people in Benghazi to lay down their arms, aid organization Medecins Sans Frontieres said the violence had forced it to withdraw its staff from Benghazi and begin moving teams to Alexandria in Egypt.
"Security conditions have made it effectively impossible for medical teams to travel safely to areas where the fighting has created the greatest need," it said.
Residents in rebel-held Misrata, 200 km (130 miles) east of the capital Tripoli, Gaddafi's stronghold, said his forces had attacked the city using tanks and artillery.
"Very heavy bombardments are taking place now from three sides. They are using heavy weapons including tanks and artillery ... They have yet to enter the town," said one resident, called Mohammed, by telephone.
A second resident, called Saadin, confirmed the account and said the attack began at 7:00 a.m. (1 a.m. ET).
PRO-GADDAFI LEAFLETS IN BENGHAZI
In Benghazi, where the revolt began in mid-February, residents said they had found some leaflets lying around in the city streets suggesting that if they gave up the fight against Gaddafi now, they would not be harmed or punished.
The leaflets accused rebels of being driven by al Qaeda and high drugs, an allegation routinely leveled by the government against an uprising that was inspired by pro-democracy rebellions that toppled the Egyptian and Tunisian presidents.
Salah Ben-Saud, a retired undersecretary at the Agriculture Ministry, said in Benghazi that life in the town was normal and "pro-Gaddafi people have not really shown their face."
"There were rumors that he (Gaddafi) would try to take back Benghazi and that made people a bit nervous, but he didn't and people here don't think he would succeed anyway if he tried."
Thousands gathered in a square in Benghazi on Tuesday evening denouncing Gaddafi as a tyrant and throwing shoes and other objects at his image projected upside down on a wall.
Foreign powers have condemn Gaddafi's crackdown but show little appetite for action to support the revolt. A Gaddafi victory and a crackdown on protests in Bahrain could turn the tide in the region against pro-democracy movements.
Supporters of a no-fly zone to halt Libyan government air strikes on rebels circulated a draft resolution at the U.N. Security Council on Tuesday that would authorize one, but other states said questions remained.
The draft was distributed at a closed-door meeting by Britain and Lebanon after the Arab League called on the council on Saturday to set up a no-fly zone as Gaddafi's troops advanced against the rebels based in the east.
German Ambassador Peter Wittig told reporters after the meeting his country still had queries, and noted that while the Arab League had called for a no-fly zone it also opposed any foreign military intervention.
Veto powers Russia, China and the United States, along with Portugal, Germany and South Africa are among the members that have doubts about the wisdom of a no-fly zone.
A senior Libyan foreign ministry official said the government hoped to regain all rebel-held territories soon.
GADDAFI VICTORY IN "DAYS"
"We hope (it will be done) as soon as possible. I hope it will be in a matter of days," Deputy Foreign Minister Khaled Kaim told Reuters in Tripoli.
In a televised speech, Gaddafi taunted Western countries that have backed the imposition of a no-fly zone to come and get him. "France now raises its head and says that it will strike Libya," he told a gathering of supporters at his Bab al-Azizia fortified compound in central Tripoli.
"Strike Libya?" he asked. "We'll be the one who strikes you! We struck you in Algeria, in Vietnam. You want to strike us? Come and give it a try."
In an interview with the Italian daily Il Giornale published on Tuesday, Gaddafi said that if western forces attacked Libya, he would ally with al Qaeda "and declare holy war."
The rebels' position looked highly vulnerable after government troops took control of the junction at Ajdabiyah, opening the way to Benghazi.
NATO has set three conditions for it to enforce a no-fly zone over Libya: regional support, proof its help is needed and a Security Council resolution.
An Arab League call for a no-fly zone satisfies the first condition, but with access to most of Libya barred by Gaddafi's security forces, hard evidence that NATO intervention is needed to avert atrocities or a humanitarian disaster is scarce.
Growing numbers of Libyans are now crossing into Egypt fleeing Gaddafi's advance, the U.N. refugee agency said.
(Reporting by Maria Golovnina and Michael Georgy in Tripoli, Tom Pfeiffer in Benghazi, Mariam Karouny in Djerba, Tunisia, Tarek Amara in Tunis, Louis Charbonneau and Patrick Worsnip at the United Nations, James Regan, Tim Hepher, Arshad Mohammed and John Irish in Paris; Writing by William Maclean; Editing by Giles Elgood)