BREGA, Libya (Reuters) - Libyan rebels repulsed a land and air offensive by Muammar Gaddafi's forces on Wednesday as the defiant leader warned foreign powers of "another Vietnam" if they intervened.
The U.S. government is already cautious about the prospect of imposing a "no-fly zone" over Libya, stressing the diplomatic and military risks involved, but has nevertheless moved two amphibious assault ships into the Mediterranean.
Rebels in their eastern bastion of Benghazi have called for U.N.-backed air strikes to halt attacks by African mercenaries they say Gaddafi is using against his own people.
Government troops, backed by air power, launched a dawn attack on Wednesday and briefly captured Brega, an oil export terminal 800 km (500 miles) east of Tripoli.
But opposition forces counter-attacked and took back the town they held for about a week, rebel officers said. They were ready to move west toward the capital, they said, if Gaddafi refuses to quit.
Basking in the adulation of loyalists in Tripoli, Libya's leader for the last 41 years, launched into a tirade against the "armed gangsters" he said were behind the unrest, part of a conspiracy to colonize Libya and seize its oil.
"We will enter a bloody war and thousands and thousands of Libyans will die if the United States enters or NATO enters," Gaddafi told Tripoli supporters at a gathering televised live.
"We are ready to hand out weapons to a million, or 2 million or 3 million, and another Vietnam will begin. It doesn't matter to us. We no longer care about anything."
Further bombing raids struck near the oil terminal in the afternoon. Estimates of the death toll during the day ranged between five and 14.
Oil prices surged to near recent 2-1/2 year highs due to fears the unrest could spread to other OPEC producers.
Gaddafi, who once said ballot box democracy was for donkeys, told the gathering in Tripoli the world did not understand he had given power to the people long ago.
"We put our fingers in the eyes of those who doubt that Libya is ruled by anyone other than its people," he said, referring to his system of "direct democracy" launched at a meeting attended by visiting Cuban leader Fidel Castro in 1977.
"SHOOT THEIR OWN PEOPLE"
A Tripoli resident and Gaddafi opponent, who did not want to be identified, told Reuters afterwards: "Gaddafi will hang on for a while. It's not going to be easy for an unarmed crowd to face highly armed forces eager to shoot their own people."
The assault on Brega appeared to be the most significant military operation by Gaddafi since the uprising erupted in mid-February and set off a confrontation that Washington says could descend into a long civil war unless Gaddafi steps down.
Witnesses said the attack was backed by heavy weapons and air strikes. One of the witnesses said Gaddafi's forces were 2-3 km from the city center and had 300-350 rebels pinned down at an oil industry airport on the city outskirts.
Hisham Mohammed, a 33-year-old mechanic on the side of the rebels, was defiant.
"I'm going to Brega to help our brothers there. I'm washed, I've prayed, and I'm ready to go to God," he told Reuters.
Analysts cautioned against drawing firm conclusions from fast moving events in a situation of erratic communications.
"The attack reinforces the idea that the government is capable of projecting power far into the east," said Shashank Joshi, an analyst at Britain's Royal United Services Institute.
"But we should keep in mind that both the government and the rebels are trying to spin an image of momentum."
In Benghazi, the rebel National Libyan Council called for air strikes.
"We call for specific attacks on strongholds of these mercenaries," said council spokesman Hafiz Ghoga. "The presence of any foreign forces on Libyan soil is strongly opposed. There is a big difference between this and strategic air strikes."
In a possible response to Western hints that the opposition needs to unify to facilitate rebel links with outside powers, Ghoga added that a former justice minister, Mustafa Abdel, Jalil, would be chairman of the Council which will have 30 members and be based in Benghazi before moving later to Tripoli.
Libya's deputy ambassador to the United Nations, one of the first Libyan diplomats to denounce leader Muammar Gaddafi and defect, said the U.N. may back a resolution for a no-fly zone if the National Libyan Council officially requested it.
Any sort of foreign military involvement in Arab countries is a sensitive topic for Western nations uncomfortably aware that Iraq suffered years of bloodletting and al Qaeda violence after a 2003 U.S.-led invasion toppled Saddam Hussein.
The Arab League said it was against direct outside military intervention, but could enforce a no-fly zone over Libya in cooperation with the African Union. Realistically though, only the United States could carry out such an operation.
Secretary of State Hillary Clinton said U.S. military assets could be used to support the movement of supplies to areas in need but a no-fly zone was not an immediate priority.
"I think we are a long way from making that decision," Clinton told a Senate hearing. "There is a great deal of caution that is being exercised with respect to any action we might take other than in support of humanitarian missions."
Two U.S. amphibious assault ships, the USS Kearsarge and the USS Ponce, passed through Egypt's Suez Canal and arrived in the Mediterranean on Wednesday.
The White House said the ships were being redeployed in preparation for possible humanitarian efforts but stressed it "was not taking any options off the table."
Defense Secretary Robert Gates said: "Our job is to give the president the broadest possible decision space." But he said that enforcing a no-fly zone meant first attacking and destroying Libyan air defenses.
"A no-fly zone begins with an attack on Libya to destroy the air defenses...Then you can fly planes around the country and not worry about our guys being shot down," Gates told a congressional hearing.
The uprising, the bloodiest yet against long-serving rulers in the Middle East, is causing a humanitarian crisis, especially on the Tunisian border where thousands of foreign workers are trying to flee to safety.
At Ras Jdir on the Tunisia border, thousands of Bangladeshi migrant workers, desperate to leave Libya, pressed up against the gates of the frontier crossing, angry at their government for sending no help.
Groups of West African migrant workers also in the crowd chanted for help and held up the flags of Ghana and Nigeria.
About 70,000 people have passed through the Ras Jdir border post in the past two weeks, and many more of the hundreds of thousands of foreign workers in Libya are expected to follow.
(Additional reporting by Yvonne Bell and Chris Helgren in Tripoli, Tom Pfeiffer, Alexander Dziadosz and Mohammed Abbas in Benghazi, Yannis Behrakis and Douglas Hamilton; Christian Lowe and Hamid Ould Ahmed in Algiers, Souhail Karam and Marie-Louise Gumuchian in Rabat, Samia Nakhoul and London; Writing by William
MacLean and Jon Hemming; Editing by Angus MacSwan)