At a meeting of more than 35 nations in London, US Secretary of State Hillary Clinton and British Prime Minister David Cameron said that allied air strikes would go on until the Libyan leader met UN demands for a ceasefire.
Two loud explosions rocked the area close to Qadhafi's tightly-guarded residence shortly after the British prime minister spoke in London, an AFP correspondent in the Libyan capital said.
The westward progress made by anti-regime rebels since Britain, France and the United States began air strikes on March 19 has stalled following opposition from Qadhafi's forces outside his hometown of Sirte.
On Tuesday, the rebels retreated 40 kilometres (25 miles) from their frontline positions to Nofilia, 100 kilometres from Sirte, which is the next big target in their efforts to oust Qadhafi as they head west towards Tripoli.
Qadhafi's forces unleashed barrages of artillery fire, triggering a stampede of rebel fighters, many fleeing aboard their pickup trucks.
Some rebels told AFP they would wait "for Sarkozy planes to strike" before advancing on Sirte -- a reference to warplanes dispatched by French President Nicolas Sarkozy.
The London conference, which included representatives from seven Arab states plus the heads of the United Nations and NATO, was intended to map out a future for Libya following the conflict.
In his opening remarks, Cameron said the air strikes were helping protect civilians.
Cameron pointed to the assault by Qadhafi's forces on the western rebel-held town of Misrata and said Qadhafi remained in "flagrant breach" of UN demands for a ceasefire.
"As I speak the people of Misrata are continuing to suffer murderous attacks from the regime," said Cameron.
"I have had reports this morning that the city is under attack from both land and sea.
"Qadhafi is using snipers to shoot them down and let them bleed to death in the street."
Tanks and troops loyal to Qadhafi swept through Misrata Tuesday, firing shells as they attacked Libya's third city, 214 kilometres (132 miles) east of Tripoli, a rebel spokesman said. He warned of a "massacre" ahead.
A doctor in the city said 142 people had been killed and 1,400 were wounded since March 18. Rebels said a hospital ship was expected to dock Tuesday in Misrata.
Clinton said military action would continue "until Qadhafi fully complies with the terms of (UN resolution) 1973, ceases his attacks on civilians, pulls his troops back from places they have forcibly entered, and allows key services and humanitarian assistance to reach all Libyans".
Ahead of the London talks, Qadhafi issued a defiant letter likening the NATO-led strikes targeting his artillery and ground forces to military campaigns launched by Adolf Hitler during World War II.
"Stop your barbaric, unjust offensive on Libya," he said in the letter. "Leave Libya for the Libyans. You are committing genocide against a peaceful people and a developing nation," he said.
The Western strikes have bolstered the rebels, and allowed them to overrun the strategic town of Ajdabiya further east on Saturday.
But a 24-hour lull in the air strikes in eastern Libya has left lightly armed rebels exposed to the Qadhafi loyalists' long-range weapons.
In their stronghold of Benghazi, a spokesman for the rebels, Shamsiddin Abdulmolah, said the London conference should decide to put Qadhafi on trial for crimes against humanity and not offer him exile.
"He must be charged for crimes against the Libyan people," Shamsiddin said, amid reports that a possible exile plan could be discussed. "This is non-negotiable."
British Foreign Secretary William Hague has called for Qadhafi to face the International Criminal Court but refused to rule out the possibility of offering the Libyan leader a safe corridor out of the country.
Representatives of the rebels' Transitional National Council (TNC) were in London on Tuesday and foreign affairs envoy Mahmud Jibril held talks with Clinton and Cameron. However, they were not invited to the conference itself.
France and Qatar have both officially recognised the council, and a French official said Tuesday that Paris would send an ambassador to Benghazi.
At the talks, UN Secretary General Ban Ki-moon offered to lead international efforts to map out Libya's future and warned that after the fighting, "Libya's people will have to re-engage with each other".
"Our long-term interest is to help them do so, focusing on the establishment of transitional arrangements that would meet the democratic aspirations of the Libyan people," he said.
US President Barack Obama had urged the international community on Monday to support "a transition to the future that the Libyan people deserve."
"Even after Qadhafi does leave power, 40 years of tyranny has left Libya fractured and without strong civil institutions," Obama warned.
"The transition to a legitimate government that is responsive to the Libyan people will be a difficult task," he added.
Obama staunchly defended his decision to join the air strikes but cautioned the military campaign was not aimed at forcing regime change, saying: "To be blunt, we went down that road in Iraq."
Coalition warplanes were in action late Monday after darkness fell, bombing regime targets on the central coast and in the west, but US officials denied the military action was intended directly to help the rebels.
Libya's deputy foreign minister Khaled Kaim told Italy's RAI television that the coalition forces of wanting to cut the country in two.
"The tactic of the coalition is to lead to a stalemate to cut the country in two, which means that the civil war is a continuous war, the start of a new Somalia, a very dangerous situation."