Under intense shelling and sniper fire, rebels in Misrata, their last major foothold in western Libya, fought Muammar Gaddafi's forces in close-quarter battles in the city centre.
Seventeen people were killed, a non-governmental organisation worker and an opposition activist said.
Government troops have been laying siege to the city on Libya's Mediterranean coast for weeks, prompting repeated international warnings of a dire humanitarian situation as well as calls for Nato forces to intensify air strikes on Gaddafi's forces there.
On Sunday government troops who have pushed into the city centre from the outskirts in recent days pounded Misrata with mortar rounds and rocket-propelled grenades, said resident Abdel-Salam.
Rebels fought government forces from an area around a central produce market, regaining a small sliver of territory, said Rida al-Montasser, a local activist. He said a hospital report that he received from a doctor, showed 17 people, including rebels, were killed and 74 others injured. He said Gaddafi forces had fired at the city's hospital on Sunday.
A worker for a foreign NGO who visited the hospital also said 17 bodies were brought in, including that of a girl shot in the head. Other children who had been shot were among the wounded, he said, speaking anonymously because he feared for his safety.
The Nato-led air campaign authorised by the United Nations to protect civilians and enforce a no-fly zone has failed to stop government shelling that, according to residents and witnesses, has hit Misrata's hospital, the port and residential areas.
The international air strikes have kept rebels from being defeated on the battlefield by the better trained and equipped government forces, but it still has not been enough to turn the tide in the war. In the eastern half of Libya, rebels in control of most of that part of the country since the uprising began on February 15 have been unable to advance westward toward the capital.
The Libyan government has come under sharp international criticism for its assault on Misrata and has been accused by human rights groups of using heavy weapons, including shells, missiles and cluster bombs. Such bombs can cause indiscriminate casualties and have been banned by many countries.
In Tripoli, Libyan government spokesman Moussa Ibrahim denied the allegations on Sunday, telling a small gathering of foreign diplomats: "Don't believe the lies."