Embattled Libyan leader Muammar Gadhafi has warned Western leaders that if they dare to attack the North African country, he would form an alliance with al-Qaida - who he previously claimed are responsible for the domestic rebellion currently taking place in Libya – and together declare holy war against the West.

Gadhafi dismissed demands by world powers for a no-fly zone or airstrikes on Libya, telling the Italian daily Il Giornale on Tuesday, "We will fight and win. A situation of that type will only serve to unite the Libyan people." If western forces attacked Libya, "We will ally ourselves with al-Qaida and declare holy war," he said.

EU leaders have slapped economic sanctions on Tripoli following the outbreak of fighting between rebel forces in the east of the country and troops loyal to Gadhafi and at a summit meeting last week demanded that he step down.

Gadhafi said that his regime represents a bulwark against Islamic extremism in the region, which could now be unleashed, triggering more serious unrest in the region. His efforts to stem African migration to Europe may be abandoned, and European countries would be faced with a flood of illegal immigrants.

"If instead of a stable government which guarantees security, these bands linked to Bin Laden take control, the Africans will move in a mass towards Europe and the Mediterranean will become a sea of chaos," he said.

The Libyan leader said French President Nicolas Sarkozy, who has officially recognized the rebel Libyan National Council and called for targeted airstrikes, had a "mental disorder".

Libyan leader Muammar Gadhafi said he felt betrayed by former European allies like Italy's Silvio Berlusconi who have turned against him and said business links with Europe risked lasting damage.

Asked about his relations with Berlusconi, previously his closest friend in Europe, he said: "I am so shocked, I feel betrayed, I don't even know what to say to Berlusconi."

In the interview, Gadhafi said the criticism of his rule from Europe, culminating in a demand by EU leaders that he leave power, had threatened ties.

"I was really shocked by the attitude of my European friends," he told the newspaper. "They have damaged and endangered a series of major accords on security that were in their interests and the economic cooperation that we had."

"When your government is replaced by the opposition and the same thing happens in the rest of Europe, the Libyan people will perhaps take new relations with the West into consideration," Gadhafi said.

Economic Ties

Until the unrest, economic ties had been blossoming. Italy, in particular had developed close links with its former colony, with which it also had agreements to block the flow of clandestine immigration from Africa. However Gadhafi said these were now under threat.

"I think and hope that the Libyan people will reconsider economic and financial ties and also those in the field of security with the west," he said.

Eni, Italy's biggest oil and gas company, has extensive operations in Libya, including long-term contracts and says it plans to invest some $25 billion there.

Other Italian companies with significant interests or ties include defense and aerospace group Finmeccanica and Italy's biggest bank Unicredit.