A defiant Kadhafi meanwhile said he was ready to "pay with our lives" to defeat the rebels and the NATO alliance, which he accused of helping them make progress on the ground, namely in the Nafusa western mountains.
NTC chief Mustafa Mohamed Abdel Jalil said the rebels had delivered to UN special envoy Abdul Ilah al-Khatib "a very specific, well-intentioned offer that Kadhafi can stay in Libya under three conditions.
"We made a proposal. The deadline has passed. The proposal has expired," he told reporters of the month-old offer.
Under the offer, Kadhafi would have had to step aside and relinquish all responsibilities, his place of residence would be the "choice of the Libyan people" and he would be under "close supervision," Abdel Jalil said.
"The period of this proposal has passed," he said. "We cannot ignore the fact that the people who have been standing against him want him out."
Abdel Jalil added it is "disappointing and unexplainable that the NTC has received a counter-proposal stating that the council, being the representative of the Libyan people, should share responsiblities of government of Libya with the Kadhafi regime."
On Tuesday, following visits to the rebel bastion Benghazi and the capital Tripoli, Khatib said Libya's rivals "remain deeply divided on how to reach a political solution."
A statement quoted Khatib as saying both sides "remain far apart on reaching agreement on a political solution" but had reaffirmed to him "their desire to continue to engage with the UN in the search for a solution."
Loyalists troops and rebels have fought their way into a stalemate five months after the start of a popular uprising that quickly turned into a civil war.
The Libyan leader is in control of much of the west and his Tripoli stronghold, while the opposition holds the east from their bastion in Benghazi.
And they are also using the Nafusa mountains in the west as a springboard for their advance on the Libyan capital to overthrow Kadhafi's regime.
But Kadhafi said he would defeat the rebels and NATO.
"We are not afraid. We will defeat them. We will pay the price with out lives, our women and our children. We are ready to sacrifice (ourselves,) he said in an audio message to his loyalists in Zaltan, near the border with Tunisia.
Kadhafi also called on his partisans to march on the Nafusa mountains and said the rebels, whom he called "traitors" must choose between "death and surrender".
In London British Foreign Secretary William Hague said Wednesday his country has expelled all remaining staff at the Libyan embassy and recognised the NTC as Libya's sole legitimate government, inviting it to take over the embassy in London.
"The prime minister and I have decided that the United Kingdom recognises and will deal with the National Transitional Council as the sole governmental authority in Libya," Hague said.
And in Washington State Department spokesman Mark Toner said the United States was also reviewing a request by Libya's rebels to open an embassy in the US capital.
"They did send an official request regarding the reopening of their embassy and we're reviewing that request. And we'll work through these issues," he said.
Libyan Deputy Foreign Minister Khaled Kaaim slammed Britain's decision as "irresponsible and illegal" under British and international law, while the NTC chairman hailed the British decision.
"We consider this irresponsible, illegal and in violation of British and international laws," he said, adding that Kadhafi's regime "will take necessary actions," in British and international courts.
For his part, the NTC's Abdel Jalil said "we express tremendous appreciation for this recognition."
The council expects the United Kingdom and Turkey to become the first countries to release some of Libya's frozen assets, which he said "unfortunately have not been liquidated to date."
In that vein, Hague said Britain would also unlock £91 million ($149 million, 102 million euros) of Libyan oil assets frozen under a UN Security Council resolution so that the rebels could benefit from them.
Abdel Jalil promised that the rebels would honour all of Libya's international agreements made prior to February 17 and that it would comply with the wishes of the international community over the fate of Kadhafi, who is now a "wanted man."
The International Criminal Court's chief prosecutor Luis Moreno-Ocampo said in a statement in the Hague that Libya and any future government of the country has the "obligation" to arrest Kadhafi.
On June 27, ICC judges issued arrest warrants for the embattled Libyan leader, his son Seif al-Islam, and Libyan spy master Abdullah al-Senussi for crimes against humanity allegedly committed since the uprising started against Kadhafi in mid-February.
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