* France suggests Gaddafi can stay in Libya if he quits
* Libya says Gaddafi departure not under discussion
* Rebels take heavy casualties in battle for Brega (Adds White House, NATO chief, French defence minister)
By Brian Love
PARIS, July 20 Muammar Gaddafi could stay in Libya if he gives up power, France said on Wednesday, signalling a new effort to find a diplomatic solution to a five-month-old war that has failed to oust the resilient leader.
The United States said Gaddafi must quit, but whether he remained in Libya after that would be up to the Libyan people.
"He needs to remove himself from power ... and then it's up to the Libyan people to decide," White House spokesman Jay Carney said when asked if Washington share France's view.
However, Gaddafi's foreign minister swiftly dismissed the French proposal, saying Gaddafi's departure after 41 years in power was not a matter for discussion.
On the battlefield, rebels suffered heavy casualties in fighting for the eastern oil hub of Brega, a town they must capture if they are to advance towards the capital, Tripoli.
Eighteen rebel fighters were killed and up to 150 wounded in the latest clashes with forces loyal to Gaddafi for control of Brega, a doctor at a rebel-controlled hospital said.
"Yesterday, it was a disaster," Dr Sarahat Atta-Alah told Reuters at Ajdabiya hospital in eastern Libya on Wednesday.
Rebels have said they have encircled Brega, but fighters said they were still coming under fire from pro-Gaddafi forces.
Rebels also reported heavy fighting near the western town of Misrata, an insurgent stronghold. Medical workers at the city's Hikam hospital said seven rebel fighters had been killed and 35 wounded. Hospital officials earlier reported that one pro-Gaddafi soldier had been killed.
The head of NATO said opposition forces had made progress and that rebels in the east and west of Libya would join up.
"I think that progress will continue because the opposition forces are now more experienced, better trained, better coordinated," NATO Secretary-General Anders Fogh Rasmussen told the Wall Street Journal in an interview published on Wednesday.
"So, I think we'll see east and west join forces and move forward," he said, adding that the military situation was "absolutely not a stalemate" and that as rebel forces had advanced, Gaddafi had suffered "a very, very clear weakening".
French Foreign Minister Alain Juppe said foreign powers were now ready to let Gaddafi stay in Libya if he stepped down.
He told French LCI TV that a U.N. envoy, Abdul Elah al-Khatib, was now coordinating contacts with the Gaddafi camp, and said no talks with Gaddafi emissaries were under way in Paris.
"One of the scenarios effectively envisaged is that he stays in Libya on one condition which I repeat -- that he very clearly steps aside from Libyan political life," Juppe said.
"A ceasefire depends on Gaddafi committing clearly and formally to surrender his military and civilian roles."
The proposal to let Gaddafi stay in Libya after stepping down reflected an awareness that it would be hard, if not impossible, to flush him out of Tripoli by force or persuasion.
"WHEN AND HOW"
"The issue now is not whether Gaddafi goes, but when and how," Juppe said. "There's the military side and the political side, which is progressing, with contacts which have not yet produced results but are coordinated by Mr al-Khatib."
A U.N. Security Council diplomat said Khatib might go to Libya next week and that the envoy sensed "a greater mood in Tripoli to engage with the proposals that he's putting forward".
The diplomat gave no details of the proposals, but said military and diplomatic pressure on Gaddafi was building up, although it was too early to gauge the Libyan leader's response.
The rebels have this week reported military progress, but Gaddafi has vowed to fight on.
U.S. officials and representatives of Gaddafi held a rare meeting on Saturday after Washington formally recognised the Benghazi-based NTC as Libya's legitimate interim government.
Libyan Foreign Minister Abdelati Obeidi, who is in Moscow, said his government was not talking about Gaddafi's potential departure from power, the Interfax news agency reported.
"Gaddafi's departure is not being discussed," Obeidi said after talks with Russian Foreign Minister Sergei Lavrov.
Brega, which provides access to most of Libya's eastern oil network, has changed hands several times in five months of fighting along Libya's Mediterranean coast.
Rebels said on Tuesday they had encircled the town, which if captured would mark a major boost for their campaign to oust Gaddafi. Insurgents said they were dug in to the south and east of Brega and in control of its eastern residential sector.
The Libyan government has denied the rebels' reports, saying its soldiers are in Brega.
A rebel lieutenant, who gave his name as Ihab, said rebel forces were between 5 and 10 km (3 and 6 miles) outside Brega and Gaddafi's forces were still in the city.
He said the area was littered with mines and Gaddafi's forces had filled trenches with petrol, which could be set on fire if rebels approached.
A rebel soldier named Izzel-Deen said: "Yesterday we saw Brega. We were very close but we turned round when they started shelling us."
In the west, Tunisian residents reported Grad rockets fired by Libyan forces had fallen on Tunisian soil near the Dehiba border crossing. No casualties were reported.
Three Libyan rebel leaders met French President Nicolas Sarkozy in Paris and said they had asked him to persuade France's Arab allies to provide them with weapons.
"France can help us get this help from friendly Arab countries," Souleiman Fortia, a representative of the NTC, told reporters after the meeting. "With a bit of help we can be in Tripoli soon."
French Defence Minister Gerard Longuet said France could keep up its air strikes in Libya as long as necessary. (Additional reporting by Nick Carey in Misrata, Rania El Gamal in Ajdabiya, Steve Gutterman in Moscow, Hamid Ould Ahmed in Algiers, David Brunnstrom in Brussels, Matt Spetalnick in Washington, Patrick Worsnip in New York and Emmanuel Jarry in Paris; Editing by Alistair Lyon)