(Adds oil production fall, background)
By Feras Bosalum and Ahmed Elumami
BENGHAZI, Libya, Sept 18 (Reuters) - Libya's elected parliament has rejected the new cabinet of Prime Minister Abdullah al-Thinni, dealing a fresh blow to the acting premier whose government was forced to flee the capital Tripoli last month after it was taken over by militants.
Western powers and Arab neighbours fear Libya will break up as the country is divided among competing tribes and the armed groups which helped oust Muammar Gaddafi three years ago and now dominate the desert nation.
Thinni, a former career soldier, has been acting prime minister since March. He stood down after June elections and the new parliament reappointed him at the start of this month.
His government has been unable to impose order and lost control of Tripoli after an armed group seized the capital in August and set up a rival cabinet and parliament there. Thinni and the elected parliament have been working from the eastern city of Tobruk since then.
But even the rump state operating out of Tobruk is divided. Thinni spent two weeks choosing a new 16-strong cabinet which he presented on Wednesday.
But lawmakers in the House of Representatives demanded Thinni submit a new cabinet with no more than 10 ministers, parliamentary spokesman Faraj Hashim said. "We have demanded that no minister will be nominated who has two passports," he added, without elaborating.
Only 103 lawmakers of the 200-strong assembly attended the session. Many elected deputies never went to Tobruk because the violence has made travel risky, while those close to the armed group controlling Tripoli declined to move.
The political haggling came as fighting between armed groups knocked out the country's biggest refinery and oil field. The 120,000 barrels a day Zawiya refinery west of Tripoli has been shut down after storage was damaged in fighting, said Ibrahim al-Awami, head of the inspection department at the oil ministry.
The El Sharara field feeding the refinery also remains closed, he said, adding that he did not know when the refinery and oil field would resume work.
Mohamed El Harari, spokesman for state-run National Oil Corp (NOC), denied El Sarara and the Zawiya refinery were completely closed but said it was hard to make forecasts. "With the current conditions in Libya it is difficult to predict what will happen in the oil sector," he said.
The closures are a big blow for the government because the refinery supplies Tripoli and the rest of western Libya with fuel products.
The field closure will bring Libya's oil production down to around 670,000 barrels a day, based on production of 870,000 bpd reported by state-run National Oil Corp (NOC) on Sunday. No output update has been given since then.
Fighting hit the western town of Zawiya in the past few days with at least a rocket hitting a refinery storage tank connecting to the southwestern El Sharara field.
Libya's oil industry had revived in the past two months after major oil ports in the east reopened following the end of a blockage by a rebel group demanding regional autonomy. (Reporting by Feras Bosalum and Ahmed Elumami; writing by Ulf Laessing; editing by Dominic Evans)