Tuesday's victory solidifies Gadhafi's hold on the western stretch of Libya's coastline from the capital to the Tunisian border.
However, rebels promise to regroup and fight back.
Zwara was one of the first towns seized by the rebels as they made gains early in the month-long uprising against Gadhafi's rule.
In Tripoli, hundreds of Gadhafi supporters celebrated in central Green Sqaure, blaring revolutionary songs, waving green flags and shooting in the air.
Moammar Gadhafi's also tried for the first time to take back a city in the opposition's heartland of eastern Libya. The military blasted rebels with airstrikes and bombardment from warships, tanks and artillery in an overwhelming display of firepower in Ajdabiya.
Meantime, the dramatic turn in Gadhafi's fortunes has outpaced French and British efforts to build support for a no-fly zone, which seemed to fall apart on Tuesday in the face of German opposition and U.S. reluctance.
Germany said that it was very skeptical about military action against Gadhafi's forces.
Gadhafi said he expects victory in the fight, saying he was not like the Tunisian or Egyptian leaders, who fell after anti-government protests.
The Associated Press contributed to this story.