Council head Mustafa Abdel-Jalil, the country's former justice minister, said the initiative "did not respond to the aspirations of the Libyan people."
He added that the AU proposal did not discuss Gadhafi's removal or that of his powerful sons and instead only involved political reforms.
Abdel-Jalil added that the rebels would "not negotiate on the blood of our martyrs."
African Union members met with Gadhafi in Tripoli on Sunday, where Gadhafi reportedly said he supports its ceasefire plan.
"It is sufficient for me to say that the leader and his delegation have accepted the 'road map' as presented by the High Panel of the AU," said President Jacob Zuma of South Africa.
Gadhafi's commitment to the ceasefire plan, though, is unclear. NATO says forces loyal to Gadhafi continue their attacks.
Libyan government forces battered the rebel-held city of Misrata with artillery fire, killing six people including a 3-year-old girl, according to a doctor.
Gadhafi hasn't abided by a cease-fire he immediately declared after international airstrikes were authorized last month. He has also rejected demands from the rebels, the United States and its European allies that he relinquish power immediately.
The secretary general of NATO, which took over control of the air operation from the U.S., said Monday that any cease-fire must be credible and verifiable.
"There can be no solely military solution to the crisis in Libya," Anders Fogh Rasmussen said. "NATO welcomes all contributions to the broad international effort to stop the violence against the civilian population."
British Prime Minister David Cameron's spokesman Steve Field told reporters Monday that NATO's action would not be halted without proof of a genuine cease-fire.
"Whether or not there is a cease-fire, that is in Gadhafi's hands. We have to judge him by what he does, not what he says," Field said.
The Associated Press contributed to this report.