GLOBAL MARKETS-Asian shares flat, still on track for winning week
* U.S. crude edges up, pulls further away from this week's lows
* U.S., allies, discuss military options
* Standoffs in Misrata, Zawiyah, deadly protests in Tripoli
* U.S. moving naval forces closer to Libyaa
(Recasts, updates throughout)
By Maria Golovnina
TRIPOLI, Feb 28 The United States and other foreign governments discussed military options for dealing with Libya on Monday as Muammar Gaddafi scoffed at the threat to his goverment from a spreading popular uprising.
With government forces massing to try to take back strategic coastal cities from rebels, the United States said it was moving U.S. naval and air forces closer to Libya.
U.S. Ambassador to the United Nations Susan Rice said Washington was in talks with its NATO partners and other allies about military options. British Prime Minister David Cameron said his government would work to prepare for a "no-fly" zone in Libya to protect the people from attacks by Gaddafi's forces.
Gaddafi himself rejected calls for him to step down and dismissed the strength of the uprising against his 41-year rule that has ended his control over eastern Libya and is closing in on the capital Tripoli.
"All my people love me. They would die to protect me," he said in a joint interview with U.S. ABC network and the BBC on Monday.
He denied using his air force to attack protesters but said planes had bombed military sites and ammunition depots. He also denied there had been demonstrations and said young people were given drugs by al Qaeda and therefore took to the streets. Libyan forces had orders not to fire back at them.
Gaddafi said he felt betrayed by the United States and accused Western countries of abandoning his government in its fight against "terrorists". U.S. President Barack Obama appeared to be misinformed about the situation, he added.
Gaddafi, 68, looked relaxed and laughed at times during the interview at a restaurant on Tripoli's Mediterranean coast.
Ambassador Rice called him "delusional".
As the uprising entered its third week, the exact situation on the ground was often hard for reporters to assess due to the difficulties of moving around some parts of the desert nation and patchy communications.
But witnesses in Misrata, a city of a half a million people 200 km (125 miles) to the east of Tripoli, and Zawiyah, a strategic refinery town 50 km (30 miles) to the west, said government forces were mounting or preparing attacks.
"An aircraft was shot down this morning while it was firing on the local radio station. Protesters captured its crew," a witness in Misrata, Mohamed, told Reuters by telephone.
A battle for the military air base was also under way, he said, although a Libyan government source denied the report.
A resident of Zawiyah called Ibrahim told Reuters by telephone that brigades commanded by Gaddafi's son Khamis were on the outskirts of the town and looked ready to attack.
In Tripoli, Gaddafi's last stronghold, several people were killed and others wounded on Monday when forces loyal to Gaddafi opened fire to disperse a protest in Tajoura neighbourhood, Morocco's Quryna newspaper reported.
The protest gathered close to 10,000 protesters, the Libyan newspaper said, quoting its correspondent.
"When the protesters reached the Souk Juma (market), they were joined by armed men from the Gaddafi battalion who were dressed as civilians and opened fire on the unarmed youths. Many among the youths were wounded and killed," it said.
More on Middle East unrest: [nTOPMEAST] [nLDE71O2CH]
Western leaders call for Gaddafi to go [ID:nLDE71Q0L4]
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In Tripoli, queues outside bakeries and soaring rice and flour prices fuelled public anger.
"There isn't enough food," said Basim, 25, a bank employee, adding that many workers in the public sector had yet to receive salaries for February.
Crowds of people also massed outside state banks, which have started distributing handouts of about $400 per family in an effort by Gaddafi's government to drum up support.
Foreign governments increased the pressure on Gaddafi to leave in the hope of ending fighting that has claimed at least 1,000 lives and restoring order to a country that accounts for 2 percent of the world's oil production.
The U.N. Security Council on Saturday slapped sanctions on Gaddafi and other Libyan officials, imposed an arms embargo and froze Libyan assets. European Union governments approved their sanctions against Gaddafi in Brussels on Monday.
SHORES OF TRIPOLI
The United States, whose Sixth Fleet operates out of Italy, said it was moving U.S. naval and air forces closer to Libya and working on various contingency plans.
"We're still in that planning and preparing mode should we be called upon to do any of those types of missions, whether humanitarian and otherwise," Pentagon spokesman Colonel David Lapan said in Washington.
Britain's Cameron, speaking in the parliament in London, urged Gaddafi to step down and said all measures would be considered to pressure him to go.
"We do not in any way rule out the use of military assets," Cameron said."I have asked the Ministry of Defence and the Chief of the Defence Staff to work with our allies on plans for a military no-fly zone."
Australian Foreign Minister Kevin Rudd said his government would ask the United Nations to approve a no-fly zone.
Foreign Minister Franco Frattini of Italy -- formerly Libya's closest ally in Europe -- told Reuters a no-fly zone was a useful measure.
Italy would consider allowing allies to use its bases but the Security Council must first approve the measure, he said.
NATO Secretary-General Anders Fogh Rasmussen distanced himself from talk of an imminent implementation, saying the Security Council resolution excluded the use of armed forces and did not mention a no-fly zone.
U.S. Secretary of State Hillary Clinton told U.N. Human Rights Council in Geneva that Gaddafi was using "mercenaries and thugs" to repress his people and that he must step down immediately.
CONTROL OF OIL
Revolutions in neighbouring Tunisia and Egypt have helped to ignite resentment of four decades of often bloody political repression under Gaddafi as well as his failure to use Libya's oil wealth to tackle widespread poverty and lack of opportunity.
Regional experts expect rebels eventually to take the capital and kill or capture Gaddafi but say he has the firepower to foment chaos or civil war.
Opposition forces are largely in control of Libya's oil facilities, which are mostly located in the east.
Industry reports suggested Libya's oil output had been halved as expatriate workers pulled out, Fatih Birol, chief economist of the International Energy Agency, said.
Bank of America Merrill Lynch estimated in a note to clients that Libya was losing about 1.2 million barrels per day, or 75 percent of its pre-revolt output, and said the unrest could mean Libyan supplies were unavailable for months.
Industry sources said actual shipments were at a standstill.
Brent crude was around $112 a barrel in choppy trading.
Wealthy states have sent planes and ships to bring home expatriate workers but many more, from poorer countries, are stranded. The United Nations refugee agency said nearly 100,000 people have fled the violence in a growing humanitarian crisis.
(Additional reporting by Yvonne Bell and Chris Helgren in Tripoli, Dina Zayed and Caroline Drees in Cairo, Tom Pfeiffer, Alexander Dziadosz and Mohammed Abbas in Benghazi, Christian Lowe and Hamid Ould Ahmed in Algiers, Muriel Boselli in Paris, Alex Lawler in London, Andrew Quinn in Geneva; Writing by Angus MacSwan; Editing by Andrew Roche)
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