* Clashes in Western Mountains
* U.S., other powers recognise rebels
* Decision means Gaddafi must go, says Italy
By Peter Graff
BIR AYAD, Libya, July 16 (Reuters) - Heavy clashes between rebels and forces loyal to Muammar Gaddafi broke out on Saturday on the front line in Libya’s Western Mountains at the town of Bir Ghanam, as insurgents seek to push towards Tripoli.
Sustained gunfire and volleys of artillery could be heard from the village of Bir Ayad, 15 km (9 miles) south of Bir Ghanam. Rebels at Bir Ghanam hold the high ground on the outskirts of the town, their closest position to the capital, Tripoli, about 80 km (48 miles) away.
Ahmed, a rebel fighter in Bir Ayad, said a convoy of about 15 vehicles from Gaddafi’s forces tried to approach Bir Ghanam, but the rebels fired at it and the convoy retreated after a about an hour of shooting.
Rebels in the Western Mountains have made steady progress in recent weeks after repelling assaults by Gaddafi’s forces. Their target is the town of Garyan, which controls the highway south from Tripoli.
But the rebels have been hampered by divisions, ill-discipline and supply problems.
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Rebel leaders won recognition as the legitimate government of Libya from the United States and other world powers on Friday in a major boost to the insurgents’ campaign to oust Gaddafi.
Western nations said they also planned to increase the military pressure on Gaddafi’s forces to press him to give up power after 41 years at the head of the North African state.
Recognition of the rebels, announced by U.S. Secretary of State Hillary Clinton at a meeting in Turkey of the international contact group on Libya, is an important diplomatic step that could unlock billions of dollars in frozen Libyan funds.
The decision came as reports circulated Gaddafi had sent out emissaries seeking a negotiated end to the conflict, although he remains defiant in his public utterances.
In a speech on Friday evening broadcast as thousands of his loyalists rallied in street demonstrations, Gaddafi rejected international recognition of the rebels.
“Trample on those recognitions, trample on them under your feet,” he told his supporters. “They are worthless.”
He said he enjoyed the support of millions of Libyans who yearned for death, martyrdom and suicide.
The Istanbul conference attended by more than 30 countries and world bodies also agreed on a road map whereby Gaddafi should relinquish power and plans for Libya’s transition to democracy under the rebel National Transitional Council, or TNC.
“Until an interim authority is in place, the United States will recognize the TNC as the legitimate governing authority for Libya, and we will deal with it on that basis,” Clinton said.
The decision to recognise the rebels, who have been waging a five-month military campaign against Gaddafi, meant the Libyan leader had no option but to stand down, Italian Foreign Minister Franco Frattini said.
The U.N. secretary-general’s special envoy to Libya, Abdul Elah al-Khatib, will be authorised to present terms for Gaddafi to leave power, but Britain said military action against Gaddafi would be stepped up at the same time.
The political package to be offered Gaddafi will include a ceasefire to halt fighting.
In the rebels’ stronghold of Misrata, the head of the local council, Khalefa Zawawi said, “What happened today at the conference in Turkey was a boost for the National Transitional Council.”
British Foreign Secretary William Hague told Reuters that at the same time as al-Khatib pursued a political settlement, “the military pressure on the regime will continue to intensify.”
China and Russia, which have taken a softer line towards Gaddafi, were invited to the contact group meeting for the first time, but decided not to become involved.
U.S. officials said the decision to extend formal diplomatic recognition marked an important step towards unblocking more than $34 billion in Libyan assets in the United States but cautioned it could take time to get cash flowing. (Additional reporting by Souhail Karam, Andrew Quinn and Ibon Villelabeitia; Writing by Giles Elgood; Editing by Peter Cooney)