* Govt official says talks under way over peace deal
* Rebel council rules out Gaddafi staying in Libya
* Five rebels killed in fresh fighting
* Saif al-Islam Gaddafi: we will win the war (Updates throughout)
By Lamine Chikhi
TRIPOLI, July 4 (Reuters) - The Libyan government said on Monday it was in talks with opposition figures but there seemed little chance of a swift end to the conflict as both sides stuck to entrenched positions on the fate of Muammar Gaddafi.
The leader’s son Saif al-Islam, in combative form, told a French newspaper there was no question of negotiating an end to his father’s 42-year rule, while the rebels, stepping back from a hint of a concession, renewed their demand that he go now.
A spokesman for Gaddafi’s administration said high-ranking government officials had been in foreign-mediated talks in Italy, Egypt and Norway with opposition figures to try to find a peace deal, and that talks were still going on.
Any talk of a possible accommodation with Gaddafi could drive a wedge into the ranks of the disparate rebel movement which sprang up in February in the wake of uprisings in neighbouring Tunisia and Egypt.
Many of Gaddafi’s opponents are flatly opposed to any form of concession to the veteran leader and are mistrustful of former Gaddafi associates who have defected to join the rebels.
The government spokesman named one of the opposition figures in the talks as Abdel Fattah Younes al-Abidi, Gaddafi’s former security minister who defected in February. It was not clear whether the talks took place with the knowledge or endorsement of the leadership of the rebel National Transitional Council.
The council, which a growing number of countries say is the Libyan people’s sole legitimate representative, has said there are no talks between it and Gaddafi’s administration.
“In the last few weeks and in several world capitals, high-ranking Libyan government officials have met with members of the Libyan opposition to negotiate peaceful ways out of the Libyan crisis,” the government spokesman said in an e-mailed statement.
“Other direct negotiations still take place as of now.”
Saif al-Islam, one of the most prominent of the leader’s sons, dismissed suggestions that there could be a peace settlement that removed his father -- a demand not only of the rebels but of the Western powers bombing Libya since March.
“My father is not part of the negotiations,” Saif al-Islam told Le Monde newspaper. “You think one can find a solution that does not involve him? No, it’s impossible.”
By backing the rebels, NATO had picked the losing side, he added: ”God is with us. We will fight and we will win.
“We have our army. We have more munitions, more weapons. Morale is high. The others are becoming weaker and weaker.”
A glimmer of concession on Gaddafi’s future from the National Transitional Council on Sunday was swiftly withdrawn on Monday when the NTC, based in the eastern city of Benghazi, contradicted remarks made by its leader Mustafa Abdel Jalil.
He told Reuters on Sunday: ”As a peaceful solution, we offered that he can resign and order his soldiers to withdraw from their barracks and positions, and then he can decide either to stay in Libya or abroad.
“If he desires to stay in Libya, we will determine the place and it will be under international supervision. And there will be international supervision of all his movements.”
However, on Monday the council issued a statement by Abdel Jalil saying: “I would like to confirm that there is absolutely no current or future possibility for Gaddafi to remain in Libya ... There is no escape clause for Gaddafi -- he must be removed from power and face justice.”
NATO says its air strikes are steadily eroding Gaddafi’s grip on power. A Reuters reporter in the centre of Tripoli on Monday afternoon said he heard aircraft overhead, followed by the sound of three explosions.
But the fighting on the ground is making slow progress. The rag-tag force of rebel fighters is bogged down on three fronts and unable to break through to the capital.
In Misrata, a rebel-held city 200 km (130 miles) east of Tripoli, there was renewed fighting on the southern outskirts. A Reuters journalist at a hospital in the city saw the bodies of five fighters who had been killed on Monday.
“The (pro-Gaddafi) brigades carried out an attack today in the area of Abdul Raouf, south of Misrata, using heavy artillery and Grad rockets,” said a rebel spokesman called Abdelsalam.
“The revolutionaries managed to repel the attack and blocked the advance of the brigades,” he told Reuters.
NATO is not doing enough to help rebels who were under attack in the front closest to Tripoli, the eastern edge of the Western Mountains, a rebel spokesman in the region said.
“We informed NATO of several clear enemy targets but they ignored our call,” he said.
In the city of Nalut, rebels were attacked by pro-Gaddafi brigades on Sunday night and Monday morning, a rebel spokesman named Mohammed told Reuters.
Libyan state television said NATO bombarded a residential area in the town of Takut and a water storage facility in the town of Badr, both of which are in the Western Mountains.
A Libyan government spokesman said Libya had arrested 11 rebels transporting about 100 light machine guns from Tunisia. The weapons had been supplied by Qatar, he said.
Western powers say international sanctions are narrowing the options for Gaddafi by blocking oil exports, leaving Libya without its principal source of revenue. His foreign currency reserves will eventually run out, they say.
In a sign cash is growing tighter, Libya’s central bank announced on its website that from now on commercial banks would need its prior approval for all operations involving foreign currency.
Libya was the focus of talks in the Russian Black Sea resort of Sochi, where President Dmitry Medvedev met both the secretary general of NATO and South Africa’s President Jacob Zuma.
After the meetings, Moscow and the Western alliance said they disagreed on NATO air strikes, but emphasised shared hopes for a peaceful solution. Zuma presented an African Union peace, a NATO official said. (Additional reporting by Hamid Ould Ahmed in Algiers, David Brunnstrom and Denis Dyomkin in Sochi, Russia, Mussab Al-Khairalla in London, Hamuda Hassan in Misrata, Maria Golovnina in Benghazi, Joseph Nasr in Berlin and Maria-Victoria Buffery in Paris; Writing by Christian Lowe and David Dolan; Editing by Alison Williams)