The forces loyal to Libyan leader Moamer Qadhafi retreated to the key town of Ajdabiya, south of Benghazi, leaving dozens of wrecked tanks along the road, an AFP reporter saw.
Sporadic shelling from the government troops targeted rebels who had followed up the withdrawal and were massed in their hundreds some three to four kilometres (one to two miles) outside Ajdabiya.
A thick plume of smoke was seen rising from inside the town, which straddles the road east to Tobruk and the Egyptian border as well as north to Benghazi.
Qadhafi's forces captured Ajdabiya last week on their drive eastward against a month old uprising and launched a fierce attack on Benghazi.
But they were halted as French air force fighters in particular strafed them for hours, soon after UN Security Council Resolution 1973 authorised all necessary measures to prevent harm to civilians.
"Even if we have to die, we will enter Ajdabiya today, God willing," rebel fighter Salman Maghrabi said.
But it was unclear how the rebels, armed with Katyusha rockets and 12.7 mm truck mounted anti aircraft guns, could storm the city without themselves causing civilian casualties.