America's UN ambassador says Gaddafi is 'delusional' as he laughs for the cameras

Defiant: Gaddafi was interviewed by the BBC and other media outlets

America branded Colonel Gaddafi "delusional" today and began moving forces to Libya in readiness for possible military action.

Fighting between rebels and government forces intensified inside the country. In one of the fiercest exchanges, the rebels rebuffed an attempt to recapture the western city of Zawiya in more than six hours of exchanges involving tanks, machine guns and anti-aircraft guns.

Defecting army units also helped rebels defend Misrata, Libya's third-largest city, and Nalut.

At the same time Libyan air force planes attacked ammunition dumps in the eastern towns of Adjabiya and Rajma to stop them falling into rebel hands. The US defence department said it was repositioning forces in the region while considering future options. The Pentagon said it was moving forces to "provide for that flexibility once decisions are made".

Washington said Col Gaddafi's interview with the BBC and other media yesterday proved he was not fit to stay in power. "It sounds, just frankly, delusional," said US Ambassador to the UN, Susan Rice. She said his behaviour, which included laughing to the cameras, "underscores how unfit he is to lead and how disconnected he is from reality".

The UN warned of an aid "crisis" as refugees tried to escape across the Libya-Tunisia border. Aid workers struggled to cope and Britain sent tents and food relief.

There were also rising fears that wider instability in the region could make oil prices rocket.

Aid minister Alan Duncan, a former oil trader, said: "If unrest spreads you could easily see $200 [a barrel] oil which would be massively painful."

The Cabinet today met for the first time after the threat by David Cameron to create a no-fly zone over Libya. Former premier Sir John Major said it need not require a full UN mandate.

He also defended Tony Blair's decision to build bridges with Gaddafi from 2004. "International politics isn't a Hampstead debating society," he said. "I do observe some of the outcomes. One of them is that Gaddafi moved away from weapons of mass destruction - that was a very significant prize."

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