* Civilians still trying to flee to the fighting
* Gaddafi forces putting up fierce resistance
* Protracted battle risks bitterness, national divisions
By Rania El Gamal and Tim Gaynor
SIRTE, Libya, Oct 10 Libyan transitional government forces said they had cornered Muammar Gaddafi loyalists in a small area in the centre of the deposed leader's hometown on Monday, but many desperate civilians were still trying to flee the fierce street clashes.
The protracted battle for Sirte, a showpiece Mediterranean coastal city largely loyal to Gaddafi, has raised concerns about many civilian casualties that could breed long-term hostility making it very hard for the National Transitional Council (NTC) to unite the vast North African state once the fighting is over.
"Gaddafi's forces are cornered in two neighbourhoods near the sea, an area of about 2-km square, but there is still resistance," Abdul Salam Javallah, commander of NTC units from eastern Libya, told Reuters on the front line of their attack.
"We are dealing with them now with light weapons because there are still families inside," he said.
Shortly after he spoke, a group of three women, three small children and two male civilians emerged from a house on the front line. They were searched by the rebels and hurriedly got into a car and drove off waving the V-for-victory sign.
Another family of three women and one man, stopping at a checkpoint as they fled Sirte, said they had been trapped in their house by the fighting.
"We didn't know where the strikes were coming from. Everyone is being hit all day and all night. There is no electricity and no water. There is nothing. There is not one neighbourhood that hasn't been hit," said one of the women, who gave her name as Umm Ismail.
Despite the claims of NTC commanders to be only using light weapons, government tanks moved into road intersections and pounded the positions of Gaddafi loyalists, while pick-up trucks mounted with heavy weapons as well as foot soldiers darted out of cover to fire wildly up ahead.
At times, NTC units came under fire from their own side, a problem becoming more acute as the rag-tag groups of government volunteers attacking from the east and west are now closing in on one another.
Anti-Gaddafi forces captured the capital Tripoli on Aug. 23 after six months of civil war, ending Gaddafi's one-man rule after 42 years, and he is believed to be in hiding in Libya's remote southern desert.
NTC forces have since struggled to take Sirte and a few other leftover bastions of Gaddafi loyalists, and this has impeded efforts to set up effective government nationwide and restart oil production, the lifeblood of the Libyan economy.
NTC forces in Sirte took three important landmark buildings on Sunday -- the main hospital, the university and the opulent Ouagadougou conference centre, built to host the summits of foreign dignitaries that Gaddafi was fond of staging.
"Eighty percent of Sirte is now under our control," said Omar Abu Lifa, a commander of government forces attacking Sirte from the west.
NTC forces have repeatedly claimed to be on the point of victory in Sirte, only to suffer sudden reversals at the hands of a tenacious enemy fighting for its life, surrounded on three sides and with its back to the sea.
In just one field hospital to the east of the city, doctors said they had received 17 dead and 87 wounded in Sunday's fighting. There were dozens more casualties elsewhere.
One man, a student, who had escaped from the centre of the city, said he had watched from a rooftop on Sunday as Gaddafi soldiers had destroyed 10 government pick-up trucks.
"Their morale is very high," said Salam Awad. "They are prepared to fight to the death."
NTC chairman Abdel Jalil said his men had reached Sirte city centre, while the only other major town in the hands of Gaddafi loyalists, Bani Walid in the interior desert to the south, was also under siege from no fewer than five sides.
"I think and I hope, with the help of God, the liberation of these two towns will be completed by the end of this week. God willing," he told a news conference in Tripoli on Sunday.
Sirte holds symbolic significance because Gaddafi turned it from a fishing village into a second capital. He built opulent villas, hotels and conference halls to house the international summits he liked to stage there. (Additional reporting by Barry Malone and Joseph Logan in Tripoli; Writing by Jon Hemming; Editing by Mark Heinrich)