The Libyan interim government has set a Saturday deadline for forces loyal to Moammar Gadhafi in the city of Sirte to surrender or face a military assault — an ultimatum Gadhafi's spokesman said would be rejected.

Pro-Gadhafi fighters are dug in around the city, his heavily-defended hometown 400 kilometres east of the capital Tripoli.

They have shown no signs of giving up, even as anti-regime forces close in on the fugitive dictator's heavily militarized hometown, some 400 kilometres east of Tripoli.

Sirte is one of Gadhafi's last remaining bastions. Those in pursuit of him were confident they were close.

"Gadhafi is now fleeing — and we have a good idea where he is," said Ali Tarhouni, a deputy in the interim National Transitional Council. "We don't have any doubt that we will catch him."

Tarhouni would not elaborate on where they believed the autocrat was hiding, but Mustafa Abdel Jalili, the chairman of the transitional council, offered Gadhafi loyalists an ultimatum during a news conference.

"No dignified, honourable nation would accept an ultimatum from armed gangs." —Moussa Ibrahim, chief spokesman for Moammar Gadhafi

"By Saturday, if there are no peaceful indications for implementing this, we will decide this matter militarily," Jalil said in the eastern city of Benghazi.

"We do not wish to do so but we cannot wait longer."

Anti-Gadhafi forces have said they are trying to negotiate a ceasefire with the city's defenders. Jalil said those talks would end Saturday following the Muslim holiday of Eid al-Fitr.

Still, the fallen regime remained ever defiant. In an overnight phone call to The Associated Press in New York, Gadhafi's chief spokesman, Moussa Ibrahim, said the ultimatum would be rejected.

"No dignified, honourable nation would accept an ultimatum from armed gangs," he said. Ibrahim reiterated Gadhafi's offer to send his son al-Saadi to negotiate with rebels and form a transitional government.

NATO's Col. Roland Lavoie told reporters Tuesday that the pro- and anti-Gadhafi forces are engaged in "discussions."

Libyan official suspected in British police shooting found dead 

Authorities in Tripoli have discovered the body of a top Libyan regime official suspected of a role in the 1984 shooting of a British policewoman outside the Libyan embassy in London, a senior official said Tuesday.

The body of Abdel Kader Baghdadi, former head of Moammar Gadhafi's Revolutionary Guards, was found along with several other corpses in a government building in Tripoli, said Usama el-Abed, deputy chief of Tripoli's new city council. Baghdadi was shot in the head, possibly in an internal feud, El-Abed said.

Policewoman Yvonne Fletcher, 25, was killed when officials inside the Libyan Embassy in London opened fire on a demonstration. The Libyans inside the embassy were eventually allowed to leave Britain. No one has ever been charged.

— The Associated Press

"We have seen dialogues in several villages that were freed — I'm not saying with no hostilities, but with minimal hostilities," he said.

NATO said it hit 22 armed vehicles, three command centres, four radar installations and several other targets around Sirte on Monday. Other targets were hit south of the city.

Lavoie said Tripoli is "essentially free," but added that NATO stands ready to continue to support the anti-Gadhafi forces as long as civilians remain under threat.

Jalil also told reporters that he met Monday with NATO officials in Qatar, where it was decided that no foreign soldiers would be needed in Libya.

"In yesterday's meeting with alliance officials, we decided that we do not need any forces to maintain security, be it international, Muslim or other," he said.

Amid fears of a mounting humanitarian crisis in Libya after months of civil war, Gadhafi's opponents got a boost Tuesday with the news that the UN had agreed to unfreeze about $1.6 billion US worth of Libyan currency currently held in Britain.

UN Secretary-General Ban Ki-moon appealed to the international community to help provide aid and funds to the National Transitional Council.

"I think we can now hope for a quick conclusion to the conflict and an end to the suffering of Libya's people," the UN chief told the Security Council.

Ban spoke shortly after Britain announced that the Security Council committee monitoring sanctions against Libya had released 1.86 billion Libyan dinar banknotes ($1.6 billion Cdn). Britain had previously blocked the export of the bank notes, in compliance with UN sanctions, but the banknotes would be delivered quickly to the Central Bank of Libya.

Family's flight

Meanwhile, the flight of Moammar Gadhafi's wife and three of his children to Algeria has angered the forces that toppled the longtime Libyan ruler from power.

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An anti-Gadhafi fighter sits on top of all the ammo he can load on his truck. Fighters found different types of munitions at a secret Gadhafi weapons cache south of Tripoli. (Derek Stoffel/CBC)

A spokesman for the new interim government said Algeria has committed an "aggressive act against the Libyan people's wish."

"We are determined to arrest and try the whole Gadhafi family, including Gadhafi himself," Mahmoud Shammam, the information minister in the new NTC Council government said late Monday night. "We'd like to see those people coming back to Libya."

The official Algeria Press Service said that Gadhafi's wife Safia, daughter Aisha, as well as sons Mohammed and Hannibal, had fled to Algeria early Monday morning.

In defending its decision to harbour Gadhafi's family members, Algeria's UN envoy Mourad Benmehidi told the BBC there is a "holy rule of hospitality" in the desert region.

"The fact that his family has moved on through the border to Algeria is very significant," CBC's Susan Ormiston said from Tripoli.

Toppling of dynasty

"It means that they recognize that they no longer have any protection inside Libya — that forces and loyalists loyal  to [Moammar] Gadhafi cannot protect the family. So this is another step in the slow toppling of the dynasty here."

Algeria has been slow to recognize the NTC as Libya's official government, and it is thought the country would harbour Gadhafi should he flee Libya, she said.

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Libyans flash V signs as hundreds demonstrate against Moammar Gadhafi in Tripoli early Tuesday. Gadhafi's wife and three of his children fled Libya to neighbouring Algeria on Monday, firm evidence that the longtime leader has lost his grip on the country. (Associated Press)

Amid celebrations in Tripoli's Martyr's Square on Monday night in advance of Eid al-Fitr, which marks the end of the holy month of Ramadan, some residents expressed their frustrations that Algeria had apparently admitted the Gadhafi family members.

"Well, Algeria is like Libya," Rami Farec told CBC's Derek Stoffel. "They are like twins — so stupid too. Two countries that help each other and you can see that."

Farec said he was only concerned about the capture of Moammar Gadhafi.

Gadhafi's new granddaughter

One day after fleeing Libya, Moammar Gadhafi's daughter gave birth to a baby girl in Algeria on Tuesday, the Algerian Health Ministry said.

An official with the ministry said that Aisha Gadhafi gave birth but provided no other information, including where that happened. The official was not authorized to be publicly named according to ministry rules.

The Associated Press

"I don’t care about her," he said. "We will [catch] her one day and she can’t be hidden for the rest of her life, you know?"

For some in Martyr's Square, it was good riddance to the family.

"Just leave, yes," said Halim Salata. "All the Libyan people want this wife and daughter and children – leave us alone."

Other residents worry that if Gadhafi's wife and children can get out of the country, then maybe he will be able to escape as well.

"Gives you a chill, some fear," said Ahmed Zen al-Abadin. "[Because] anything can happen right now. If his family fled, then anything can happen."

Canadian Prime Minister Stephen Harper is expected this week to meet with other world leaders in a round of talks about the future of a post-Gadhafi Libya.

The discussions, to be held in Paris, will focus on what the interim National Transitional Council needs in order to rebuild the country. The prime minister's chief spokesman, Dimitri Soudas, said the meeting on Thursday will not be about formal offers of assistance from Canada until the international community co-ordinates assistance.

With files from The Associated Press