WRAPUP 1-Gaddafi Defiant, Govt Said Talking with Rebels

By Missy Ryan

* Gaddafi urges people to 'liberate Libya' from NATO

* Rebels, gov't representatives talk in Tunisia-source

* Govt spokesman says no talks on Gaddafi departure

* Rebels occupy centre of Zawiyah, control supply route

By Missy Ryan

TRIPOLI, Aug 15 (Reuters) - Libyan leader Muammar Gaddafi urged his people early on Monday to "liberate Libya" from NATO and traitors, a day after rebels captured a key town on the road west to Tunisia, severing Tripoli's main supply route.

Late on Sunday, representatives of Gaddafi's government were holding talks with rebels at a hotel on the southern Tunisian island of Djerba, a source with direct knowledge of the talks said -- though the government spokesman denied it.

The talks followed a dramatic advance by the rebels that won them control of the town of Zawiyah, 50 km (30 miles) west of Tripoli on the coast, enabling them to halt food and fuel supplies from Tunisia to Gaddafi's stronghold in the capital.

Tripoli was not under immediate threat from a rebel attack, but rebel forces are now in their strongest position since the uprising against 41 years of Gaddafi's rule began in February, controlling the coast both east and west of Tripoli.

Gaddafi's speech on Monday, delivered over a poor quality telephone line and broadcast by state television in audio only, was his first public address since rebel fighters launched their latest offensive, the biggest in months.

"The Libyan people will remain and the Fateh revolution (which brought Gaddafi to power in 1969) will remain. Move forward, challenge, pick up your weapons, go to the fight for liberating Libya inch by inch from the traitors and from NATO," the Libyan leader said.

"Get ready for the fight ... The blood of martyrs is fuel for the battlefield," he said, in what state television said was a live speech.

At the talks in Djerba late on Sunday, "Representatives of the rebels and Gaddafi representatives are having a meeting now," said the source, who spoke on condition of anonymity. He did not identify the negotiators.

In Tripoli, government spokesman Moussa Ibrahim blamed Western leaders and the media for the spread of rumours that Gaddafi's government was engaged in talks on the leader's departure from Libya.

"This information is absolutely incorrect and it is part of a media war against us. Their target is to confuse us, break our spirit, and shake our morale," he said.

"The leader is here in Libya, fighting for the freedom of our nation. He will not leave Libya," Ibrahim said.

Gaddafi's characteristically defiant speech followed a day of action across a swathe of northwest Libya during which rebels said they had seized the town of Surman, next door to Zawiyah, there was fighting in the town of Garyan that controls the southern access to Tripoli, and shooting could be heard near the main Libyan-Tunisian border crossing.

Government spokesman Ibrahim said Zawiyah and Garyan were "under our full control" but that there were small pockets of fighting in two other locations in the area around Tripoli.

The coastal highway between Tripoli and Tunisia had not been blocked by the fighting, Ibrahim said in a telephone interview on Sunday, but foreigners were not being allowed to use the route "to save them from any bullets here or there".

REBEL FLAG

Rebels from the Western Mountains region to the south advanced into Zawiyah late on Saturday, and early on Sunday, about 50 rebel fighters were milling around near the central market, triumphantly shouting "Allahu Akbar!" ("God is greatest").

The red, black and green rebel flag was flying from a shop. At the point where it passes through Zawiyah, the main highway linking Tripoli to Tunisia was empty of traffic.

Rebel fighters told Reuters there were still forces loyal to Gaddafi in the town, including snipers on tall buildings. Bursts of artillery and machinegun fire could be heard.

One rebel fighter said Gaddafi's forces controlled the oil refinery on the northern edge of Zawiyah -- a strategic target because it is the only one still functioning in western Libya and Gaddafi's forces depend on it for fuel.

The fighting was spreading west from Zawiyah along the coastal highway towards the main Ras Jdir border crossing with Tunisia. A rebel spokesman called Abdulrahman said a rebel force had seized Surman, the next town west along the coast from Zawiyah.

But at the border crossing to Tunisia, Libyan customs and immigration officers were operating as usual, despite reports of clashes between rebels and pro-Gaddafi forces in the area late on Saturday.

On another front in Sunday's fighting, near Garyan, heavy gunfire could be heard from the town, a Reuters reporter in the area said. A rebel fighter told Reuters "We control 70 percent of Garyan. There is still fighting taking place at the moment."

Rebels, backed by NATO warplanes, have been trying since February to end Gaddafi's rule in the bloodiest of the "Arab Spring" uprisings convulsing the Middle East.

After a period of deadlock, the rebels' advance to the Mediterranean coast near Tripoli represents a major shift in the balance of forces.

Gaddafi says the rebels are armed criminals and al Qaeda militants, and has described the NATO campaign as an act of colonial aggression aimed at stealing Libya's oil. (Additional reporting by Ulf Laessing in Ras Jdir, Tunisia, Missy Ryan in Tripoli, Robert Birsel in Benghazi and Hamid Ould Ahmed in Algiers; Writing by Christian Lowe; Editing by Tim Pearce)