Thousands of rebels got ready to launch an assault on the town of Bani Walid.
It is believed that heavily-armed loyalists and Gadhafi supporters are inside the city, waiting for a confrontation.
Also Sunday, NATO revealed that it bombed several military and police targets near Gadhafi's hometown of Sirte overnight.
Rebel forces control most of the oil-rich North African nation and are already setting up a new government, but Gadhafi and his staunchest allies remain on the run and enjoy support in several central and southern areas, including Bani Walid and Sirte.
According to rebel forces, Gadhafi does have some genuine supporters in Bani Walid, mainly people linked to the dictator through an elaborate patronage system that helped keep him in power for nearly 42 years.
The Associated Press contributed to this report.