By Maria Golovnina
WISHTATA, Libya, Sept 7 (Reuters) - Haunted by gun-toting loyalists and festooned with faded portraits of Muammar Gaddafi, the besieged Libyan town of Bani Walid remains stubbornly in the hands of die-hard gunmen raring to fight for their deposed leader.
Anti-Gaddafi fighters at the gates of Bani Walid, one of the last remaining strongholds of the old regime, have so far failed to convince the town's pro-Gaddafi masters to lay down their arms and surrender.
Outside the town, Bani Walid residents passing through a sun-scorched checkpoint of anti-Gaddafi forces set up around the nearby desert settlement of Wishtata painted an increasingly desperate picture inside their town.
"People are terrorized, there is no one in the streets," said Salah Ali, a 39-year-old man, as others squatted beside a tiny mosque reading newspapers with "Gaddafi: Dead or Alive" bannered on front pages.
"But many still support Gaddafi because they were paid by the regime, because many have committed crimes and are afraid of arrest."
Inside Bani Walid, tucked away in barren hills about 150 km (90 miles) south of the capital Tripoli, Gaddafi's green flags still fly above households and a huge portrait of Gaddafi in military uniform towers above its central square.
Shooting in the air and yelling insults from the back of their pickup trucks, packs of Gaddafi loyalists regularly speed through the streets, according to residents.
They often shout "Allah, Muammar, Libya, nothing else!" -- the principal slogan of the old era.
"I went to see my family there yesterday," said Imad Mohammed Ali, a 21-year-old supporter of the forces of Libya's interim authority, the National Transitional Council (NTC).
"There is no electricity, no cooking gas, no communications, there isn't enough food. People are using coal to make fire. There is no medicine. There are no people in the streets."
FIGHT "THE RATS"
Gaddafi loyalists transmit regular radio messages calling on people to take up arms and fight "invading gangs" and "rats" -- a fading legacy of Gaddafi's once mighty propaganda machine, still working with full force in this desolate corner of Libya.
And, with most means of communication with the outside world severed, some locals in the town of 100,000 firmly believe that Gaddafi still controls most of the country, residents said.
They said the brunt of Gaddafi forces are dug into a valley near Bani Walid, armed mainly with anti-aircraft guns but also possibly with several multiple rocket launchers.
"The Gaddafi brigades are positioned in Zeitun valley," said Salah Ali, a rebel fighter who spoke to his brothers living inside the town Wednesday. "In the streets there are Gaddafi volunteers in civilian clothes. They shoot to terrorize people."
Huddled inside their homes with no electricity and little water, people are too frightened to venture out into the streets after dark. Gunfire reverberates around the town at night.
"All the shops are closed. People are not moving about. Sometimes there are clashes and gunfire," said a man driving out of Bani Walid through an NTC checkpoint. He asked not to use his name.
With no end to the standoff in sight and NTC forces poised to take Bani Walid by force, refugees have been streaming out of the city from its eastern side, their cars loaded with sacks of food and personal belongings.
NTC fighters say they do not want to fight, preferring to reach a peaceful deal with the town's powerful Warfalla tribe and enter peacefully.
But a field hospital has already been set up near Bani Walid. A doctor there, Haithan Isa, said: "We are ready for the worst."