US Secretary of State Hillary Clinton said any such decision was a "long way" off, and NATO officials were divided.
The 22-member Arab League appeared ready to offer alternatives to western intervention. But it ruled out supporting any direct foreign military intervention in Libya.
With a humanitarian crisis worsening on Libya's western border, Britain said it was sending planes to airlift thousands of Egyptians stuck in refugee camps, while France said it was sending a helicopter carrier to waters off Libya to help evacuate civilians.
Kadhafi's prediction of more bloodshed came in a two-and-a-half-hour speech at a ceremony in Tripoli to mark 34 years since he announced his "republic of the masses".
Speaking live on state television, Kadhafi warned that the "battle will be very, very long" if there is any intervention by foreign powers.
"If the Americans or the West want to enter Libya they must know it will be hell and a bloodbath -- worse than Iraq."
Addressing "our friends in Europe and the West," he said it is "not at all in their interest to shake the Libyan regime."
In an impassioned speech, he again blamed Al-Qaeda for the challenge to his 41-year iron-fisted rule, saying the objective was to control Libya's land and oil.
"This is impossible, impossible. We will fight to the end, to the last man, the last woman... with God's help."
Calls for a no-fly zone have come in response to media accounts that Kadhafi's forces have used planes and helicopter gunships to fire on civilians.
The Arab League said after a meeting of foreign ministers in Cairo that "the Arab countries cannot remain with their arms folded when the blood of the brotherly Libyan people is being shed".
One of the issues it said it will consider is "the imposition of an aerial exclusion zone" in cooperation with the African Union.
Such a stance may win support from France, a strident supporter with Britain of a no-fly zone, albeit only with approval from the United Nations. Foreign Minister Alain Juppe said any operation could turn Arabs against Europe.
Muslim-majority Turkey has already said any NATO involvement would be "unthinkable".
Fighter jets launched air strikes on the rebel-held town of Brega and its oil installations as Kadhafi on Wednesday launched his first assault on opposition positions since a popular uprising swept most of the east of the country from his control.
Despite pounding rebels with heavy weaponry and tanks, Kadhafi's forces were driven back by reinforcements trucked in from Benghazi, the main city under opposition control.
A huge blast rocked the coastal town and plumes of smoke billowed into the sky, an AFP reporter said, as clashes continued hours after the opposition said they had repelled one of the biggest pro-Kadhafi counter-offensives yet.
"Now they're limited to the university and the gates of the oil company. Their ammunition is running out. They're firing randomly. We'll take these positions by nightfall," said one rebel fighter who gave his name as Mohammad.
As fighting raged, an AFP reporter at one of the two hospitals in Brega, 200 kilometres (125 miles) southwest of Benghazi, saw the bloodied bodies of four young men in a morgue, while rebels said at least 10 people had died.
Libyan warplanes earlier Wednesday also launched airstrikes on Ajdabiya, 40 kilometres from Brega, targeting either an arms dump or a military base taken over by opposition forces, they said.
As battles raged, the humanitarian situation became more critical.
UNHCR spokeswoman Sybella Wilkes told AFP in Geneva that the situation on the Libya-Tunisia border was dire.
"My colleagues on the ground say that acres of people, as far as you can see, are waiting to cross," she said.
"They are outdoors in the freezing cold, under the rain, many of them have spent three or four nights outside already," said the spokeswoman from the Office of the High Commissioner for Refugees, appealing for "tens if not hundreds of planes" to help end the gridlock.
More than 100,000 people have already left Libya to escape a vicious crackdown by Kadhafi loyalists which has left at least 1,000 dead, according to conservative UN estimates.
A spokesman for the Libyan Human Rights League said Wednesday the toll could even be as high as 6,000.
Crude oil prices spiked higher Wednesday over the violence.
Benchmark WTI light, sweet crude oil for April delivery settled at $102.23 on the New York Mercantile Exchange, a steep $2.60 rise from Tuesday's close.
In London, Brent North Sea crude for delivery in April advanced 93 cents to $116.35 a barrel.
Anger at authoritarian Arab regimes in the Middle East and North Africa raged from Algeria to Yemen and has spread to the previously unaffected Gulf states of Kuwait and Oman, unnerving financial markets around the world.
Hundreds of Omanis demonstrated on Wednesday in support of Sultan Qaboos as more than 400 activists camped outside the Gulf state's consultative council, in a counter-demonstration protesting corruption.
Yemeni President Ali Abdullah Saleh called a senior White House aide to express regret for his searing criticism of Israel and the United States over the Arab uprisings, officials said.
Saleh called President Barack Obama's top anti-terrorism adviser, John Brennan, a day after the White House complained he was scapegoating, after he described the Arab uprisings as an Israeli plot backed by Washington.
----------------------------------------------------------------------------------