• Rebels retreat from Ras Lanuf and Zawiya • Regime warns of full-scale military action • Nato in paralysis as US blocks no-fly zone • Navy chief says Britain ready to send more ships

The Gaddafi regime has issued a defiant warning that the "time for action" had arrived as a sustained military assault forced the defeat of Libyan rebels in the strategically important town of Zawiya and their retreat from Ras Lanuf.

Amid squabbling among EU and Nato leaders on the eve of an emergency European summit on Libya in Brussels, Muammar Gaddafi's son said that a new offensive would be launched within days.

"It's time for liberation. It's time for action," Saif al-Islam told Reuters after the defeat of opposition forces in the town of Zawiya, 30 miles from Tripoli, and the rout of rebels in the town of Ras Lanuf. He added: "We are moving now."

The tough rhetoric from the Gaddafi regime – and its apparent success on the ground against the rebels – set the scene for a difficult emergency EU summit where leaders are expected to clash on the military and diplomatic response to the gravest crisis on their doorstep since the collapse of Yugoslavia. Fears among Libyan opposition groups that they will be defeated by the time Europe and the US agree on a course of action were heightened when:

• Nato was left paralysed as the US joined Germany in blocking the imposition of a no-fly zone supported by Britain and France. Robert Gates, the US defence secretary, said at a meeting of Nato defence ministers in Brussels that contingency planning for a no-fly zone would continue, before adding "that's the extent of it".

Adding to the sense of diplomatic and political disarray, the AFP news agency reported that French president Nicolas Sarkozy will propose air strikes on Gaddafi's command headquarters to EU leaders. There was no confirmation by Sarkozy's office.

• Britain and France, which led the calls for today's emergency summit in the face of scepticism from Germany, differed on how to deal with the rebels. William Hague shared the irritation of some of his counterparts at a foreign ministers' meeting in Brussels when it was announced in Paris that France was recognising the Transitional National Council as the "only legitimate representative of the Libyan people". Hague spoke by phone with Mahmoud Jabril, the council's special envoy, who is expected to attend tomorrow's EU summit. But Hague pointedly said: "That leadership are legitimate people to talk to, of course, but we recognise states rather than groups within states."

• David Cameron and Sarkozy are also expected to clash today over the future of EU funding for north Africa and the Middle East. Britain wants to withhold £1bn in annual EU support for the region unless greater democracy is introduced. France is strongly opposed to the proposal which it regards as an assault on funding which benefits Francophone countries.

• The Royal Navy is preparing a series of detailed contingency plans that could see more British ships being sent to the Libyan coast if ministers require them, the Commander of the Fleet has told the Guardian. In an exclusive interview, Admiral Sir Trevor Soar said that one option available to the government would be to deploy the Response Force Task Group – a new type of flexible unit that comprises up to six different support and warships.

Cameron and Sarkozy tried to give the EU summit a sense of direction by submitting a series of proposals in a joint letter to Herman Van Rompuy, the council president. Their demands included the immediate departure of Gaddafi "and his clique", sending a "clear political signal" that the transitional council is seen by the EU as "valid political interlocutors" and for Gaddafi to call an immediate halt to the use of force against civilians.

The leaders of Britain and France wrote: "This deliberate use of military force against civilians is utterly unacceptable. As warned by the security council, these acts may amount to crimes against humanity. All those involved in deciding, planning or executing such actions must know that they will be held accountable."

The differences within the EU came as the US director of national intelligence, James Clapper, told Congress the rebels may face defeat because Gaddafi's forces are considerably better equipped. Clapper told the Senate's armed services committee the insurgents were in for a "tough roll" and in the longer term "the regime will prevail". He said: "We believe Gaddafi is in this for the long haul. He appears to be hunkering down for the duration."

Washington tried to reach out to the rebel groups when Hillary Clinton announced she would meet opposition leaders in the US and during an overseas tour next week to France, Tunisia and Egypt. "We are standing with the Libyan people as they brave bombs and bullets to demand that Gaddafi must go – now," Clinton told a House panel in Washington.

But her belated intervention came as the momentum in the conflict seemed to be shifting from the rebels, who only a week ago were advancing on Gaddafi's home town of Sirte, to pro-regime forces who have used aircraft, artillery and rockets to halt the rebels. In the last two weeks pro-Gaddafi forces have crushed dissent in the capital, Tripoli, and used tanks to stamp out opposition in Zawiya.

With the capital and surrounding towns in western Libya increasingly secure, it had been expected that Gaddafi would turn his attention next to halting and then turning back the rebel advance from the east.

Although the pro-Gaddafi forces struggled to defeat a numerically far smaller number of defenders in Zawiya, the regime has a huge military advantage in terms of tanks and rocket launchers and, crucially, modern attack aircraft which the opposition lacks. Its elite units – particularly the Khamis Brigades led by one of Gaddafi's sons, are far better trained and equipped than the often disorganised rebel forces.

Gaddafi's son said the renewed offensive, which has been building for several weeks, would be launched following the refusal of rebels to negotiate or lay down arms. "Time is out now. It's time for action … we gave them two weeks [for negotiations]," Saif al-Islam said in a speech to supporters.

The Libyan leader's son was referring to offers of a "national dialogue", approaches to tribal leaders and an offer of an amnesty made by his father last week. Rebel leaders in the east said they would accept nothing but Gaddafi's overthrow.

Vowing that the rebels would be defeated, Saif said: "We will never ever give up. We will never ever surrender. This is our country. We fight here in Libya."

Saif also warned against western military intervention. "The Libyan people, we will never ever welcome Nato, we will never ever welcome Americans here. Libya is not a piece of cake."

Saif al-Islam described rebels determined to end Gaddafi's 41-year rule as terrorists and armed gangsters and said thousands of Libyans had volunteered to fight them.

Additional reporting by Chris McGreal, Ewen MacAskill and Nick Hopkins