The national council -- the embryonic provisional government -- made its proclamation at a meeting in Benghazi, the rebel stronghold in the east of the North African country.
"The council declares it is the sole representative all over Libya," former justice minister Mustafa Abdel Jalil said.
Abdel Jalil, one of the first high-profile Libyans to defect from Kadhafi's four-decade regime when the uprising began last month, has been appointed chairman of the 30-member body.
The council formed a committee to "manage the crisis." It will be led by Mahmud Jibril Ibrahim al-Wurfalli, with former economy minister and recently resigned ambassador to India Ali Abdelaziz al-Issawi responsible for foreign affairs.
Those two men were tasked with making contacts abroad with the goal of seeking recognition of the council.
Meanwhile, Kadhafi's government asked the Arab League to reverse a February 22 decision suspending it from the organisation's meetings, Libyan Deputy Foreign Minister Khaled Kaaim said.
In Zawiyah, a strategic centre for anti-regime protests just west of Tripoli, a doctor accused Kadhafi loyalists of committing a massacre by raining tank shells and machine gun fire on residents.
"This was a real massacre. The situation is catastrophic. They killed many people. They killed my daughter," the doctor told AFP by telephone.
Later, there were reports tanks manned by Kadhafi's forces had fired on houses when they launched a fresh assault to capture the city.
A doctor in Zawiyah told AFP that at least seven people were killed. Sky News television reported the total number rose to 12, with 60 injured.
"What happened this morning is horrible. The mercenaries opened fire on anyone who dared go outdoors, even on children," the doctor said.
The doctor and a resident said rebels were still in control of the centre of Zawiyah. Another resident said loyalists were pushed out of the city.
Reporting from Zawiyah, Sky News correspondent Alex Crawford said pro-Kadhafi forces shot at civilians.
"We witnessed a fresh column of tanks coming into the town, at least five. They were loaded up with soldiers," Crawford said.
"As they went by, the soldiers were shooting at people sitting and standing outside their homes, including a family which has a 10-year-old boy," she said.
Other tanks attacked elsewhere in the city, Crawford was told.
The rebel forces have weapons including tanks, anti-aircraft guns, anti-tank missiles, rocket-propelled grenades, and assault rifles.
An AFP reporter saw groups of rebels in the small settlement of Bin Jawad.
A retired soldier-turned-rebel said an advance further towards Sirte would depend on reinforcements and the weather. A dust storm reduced visibility in Ras Lanuf on Saturday.
Negotiations for a peaceful entry into Sirte were possible.
"We can easily enter Sirte, but we want to avoid the loss of life," Namil Mashash, a rebel leader in Ras Lanuf, told AFP. "That is why we are negotiating to go to Sirte without fighting and then continue on to Tripoli."
Defected soldier Ibrahim al-Atrashi said 7,000 men have moved from Benghazi west towards the front in the past three days.
After clashes Friday, the rebels controlled Ras Lanuf, a pipeline hub on the Mediterranean coast with a major refinery and petrochemical complex.
Hospitals in rebel-held towns to the east said they received up to 10 dead and more than 20 wounded from Friday's fighting.
On Saturday, Libyan planes circled Bin Jawad and Ras Lanuf and reportedly dropped one bomb.
The ragtag rebel force said they downed a fighter near Ras Lanuf, killing the two pilots, according to a video seen by an AFP correspondent.
One rebel said: "I want to give a message to America. See these planes? We want a no-fly zone," something Western powers have so far been unwilling to impose.
At funerals in Ras Lanuf, another man said "there will be rivers of blood... How long will the West hold back and do nothing?"
French Foreign Minister Alain Juppe said Saturday his country supports a UN Security Council resolution to impose a no-fly zone, and that French officials are working with the British on it.
Meanwhile, Libya's neighbours Tunisia, Algeria and Egypt, as well as France and Italy, mobilised Saturday to receive and repatriate a tide of migrants fleeing the unrest. The United States donated $3 million to the effort.
An estimated 100,000 migrants have crossed the Tunisian border with Libya since February 20, Tunisian officials said.
Elsewhere in the Arab world, the Saudi interior ministry banned protests, claiming they ran counter to Islamic sharia law and Saudi traditions, while Omani Sultan Qaboos sacked two ministers.
In Algeria, police Saturday foiled another attempt by opposition protesters to march in Algiers to demand regime change.
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