Pro-Gaddafi forces have broken through rebel defences in the Libyan city of Zawiyah, according to reports.
Witnesses said Colonel Muammar Gaddafi's supporters were inside the closest city to the capital - Tripoli.
They said the loyalists overcame rebel positions with heavy mortar shelling and machine gun fire.
Sky News has witnessed fierce fighting on Saturday morning in the area.
Special correspondent Alex Crawford has seen ongoing battles in Zawiyah, where people are forced to shelter in mosques, in the city 30 miles west of Tripoli.
"There is a lot of shelling by tanks and machine guns being used on the streets outside," Crawford said.
"At least two of the attacking tanks have been destroyed and some troops have been captured.
"There is an awful lot of fighting outside the mosque."
The bloodshed signalled an escalation in efforts by both sides to break the deadlock that has gripped Libya's 18-day upheaval, which has lasted longer than the Egyptian revolt that has inspired a wave of protests across the region.
At least 37 people died in earlier fighting across the country, and at an explosion in an ammunitions depot in the east.
Mr Gaddafi's troops have had little success in taking back territory, with several rebel cities repelling assaults and the entire eastern half of the country under rebel control.
But the opposition forces have seemed unable to go on the offensive to march on pro-Gaddafi areas.
Meanwhile, in Tripoli - Mr Gaddafi's most important bastion - his loyalists have waged a campaign of terror to ensure that protesters do not rise up in significant numbers.
The counter-assault started on Friday in Zawiyah to thwart a wider attack on Tripoli by rebels, after repeated earlier forays against it were beaten back.
Troops from the elite Khamis Brigade bombarded Zawiyah's western edges with mortar shells, heavy machine guns, tanks and anti-aircraft weapons.
By Friday evening, another brigade had opened a front on the eastern side while armed Zawiya citizens backed by allied army units were fighting back.
The commander of the rebel forces - Colonel Hussein Darbouk - was killed by fire from an anti-aircraft gun, Alaa al-Zawi, an activist in the city said.
Darbouk was a colonel in Mr Gaddafi's army who defected along with other troops in Zawiyah early in the uprising.
A witness in Zawiyah's hospital said at least 18 people were killed and 120 wounded on Friday.
"There is very little the medical staff can do to help the wounded," Sky's Crawford said.
Col Gaddafi's son Saif earlier told Sky News that air raids on rebels were designed only to intimidate rather than cause deaths.
Libyan state TV reported on Friday that the attackers had retaken Zawiyah but Crawford's eyewitness account show this claim to be false.
A doctor in Zawiyah earlier said pro-Gaddafi fighters would not allow medics to treat the injured, opened fire on ambulances trying to assist and hauled away the bodies of some of the dead in an apparent effort to keep death toll reports low.
The gunmen killed a wounded rebel with three shots as a medic tried to pull him to safety, then even threatened to shoot the medic, the doctor said.
The doctor and witnesses spoke on condition of anonymity for fear of retaliation.
Friday's other fighting took place at Ras Lanouf, a small oil port 380 miles east of Tripoli, just outside the long swath of eastern Libya controlled by the opposition.
Rebels attacked Ras Lanouf on Friday afternoon, feeling flush with victory after repelling Gaddafi forces who attacked them days earlier at Brega, a larger oil facility just to the east.
Fighters armed with Kalashnikovs and heavy machine guns were seen streaming in pickup trucks and other vehicles from Brega heading in the direction of Ras Lanouf.
They battled about 3,000 pro-Gaddafi troops, mainly around the facility's airstrip, said a resident of the town.
She reported heavy explosions starting around 4pm and as night fell the explosions eased, she said.
But it was not clear who was in control of the complex, which includes a port and storage facilities for crude coming from fields in the deserts to the south.