WRAPUP 3-Gaddafi loyalists in two small pockets of Sirte
* Gaddafi's men resisting from two small areas
* Gaddafi's son Mo'tassim believed to be in Sirte
* Civilians still emerging from the ruins of the town (Updates with discovery of corpses)
By Rania El Gamal and Tim Gaynor
SIRTE, Libya, Oct 12 (Reuters) - - Fighters loyal to deposed Libyan leader Muammar Gaddafi are now holding out in just two small pockets of his home town Sirte on Wednesday, government commanders said after making gains overnight.
Gaddafi loyalists have fought tenaciously for weeks in Sirte, one of just two major towns they still control nearly two months since rebels seized the capital Tripoli.
Fighters from the interim Libyan government's volunteer army walked slowly up the same battle-scarred streets strewn with empty ammunition cases where they had fought fierce clashes a day before. Other fighters searched the damaged houses as a few dazed civilians emerged from their basements.
"More than 80 percent of Sirte is now under our control. Gaddafi's men are still in parts of the Number Two and the 'Dollar' neighbourhoods," said National Transitional Council (NTC) commander Mustah Hamza.
In the "Number Two" neighbourhood, government forces found 25 corpses wrapped in plastic sheets. They accused pro-Gaddafi militias of carrying out execution-style killings.
Five corpses shown to a Reuters team wore civilian clothes and had their hands tied behind their backs and gunshot wounds to the head. An NTC commander said the corpses had been there for at least five days.
Green flags, the banner of Gaddafi's 42 years in power, still flew above many of the buildings in the neighbourhood, but all appeared quiet.
NTC fighters manoeuvred a tank into a small side street flooded with sewage from a burst pipe. It fired a few rounds at a large building up ahead, then infantrymen moved in, letting off bursts from their AK-47s as they advanced up the street.
At first, there was very little return of fire from the pro-Gaddafi side. But the government fighters had walked into an ambush. Hit by a hail of RPG and small arms fire, the NTC men scrambled back to safety, one nursing a wound to his hand.
Medical workers at a hospital outside Sirte said four NTC fighters were killed and 43 others were wounded on Wednesday.
"TWO MORE DAYS"
The NTC has said it will start the process of rebuilding Libya as a democracy only after the capture of Sirte, a former fishing village transformed by Gaddafi into a showpiece for his rule replete with lavish conference halls and hotels.
NTC chairman Mustafa Abdel Jalil said on a visit to Sirte on Tuesday that it would take two more days to take the town. Gaddafi himself is believed to be hiding somewhere far to the south in the vast Libyan desert.
But the remnants of Gaddafi's forces, surrounded on three sides in Sirte and with their backs to the sea, have so far fought tenaciously, perhaps believing they face mistreatment or worse at the hands of their ill-disciplined foe.
Back from the front line, fighters from the National Transitional Council jostled with one another as one man tried to punch a wounded prisoner and others struggled to keep him off. The prisoner repeatedly shouted out that he was a civilian.
"But you had a gun," his captors said.
"I never used it," he said, fear in his eyes.
Any male of fighting age still in Sirte was under suspicion.
"We were staying in a basement," one man, Gamal Ammar, said alongside family members. "Some of us were hit. If we had died it would have been better. We had no water and no food. We couldn't get out." As NTC fighters drew near, he fell silent.
One man held up a passport and said: "I am Sudanese and I was not fighting." He was put in plastic cuffs and led away.
Gaddafi recruited large numbers of black Africans to his forces. NTC fighters often accuse every black man, including migrant workers, of having fought for the former leader.
Four other men being taken away on the back of a pick-up truck said they were from Chad and also denied taking part in the conflict.
NTC fighters pushed back reporters trying to talk to them. "They are liars, we found guns with them," one said. (Additional reporting by Barry Malone and Joseph Logan in Tripoli; Writing by Jon Hemming and Joseph Nasr; Editing by Peter Graff)