Hundreds of Libyan rebels have fled a key oil port under a barrage of rockets and tank shells from government forces.
The defeat expands Muammar Gaddafi's control of Libya as Western nations struggle to find a way to stop him.
France became the first country to recognise the rebels' governing council and an ally of President Nicolas Sarkozy said his government was planning "targeted operations" to defend civilians if the international community approves.
The Obama administration said it was suspending relations with the Libyan embassy in Washington and Secretary of State Hillary Clinton said she would meet opposition leaders in the United States, Egypt and Tunisia.
But there was no sign of Western moves toward military assistance, such as the no-fly zone that the rebels pleaded for as they retreated through the flat desert scrubland outside the port of Ras Lanouf, scanning the skies for government warplanes.
The fleeing rebels said government forces bombarded Ras Lanouf in preparation for a full-scale advance. Lightly-armed opposition members fled eastward in cars and pick-up trucks mounted with machine guns.
Taking back Ras Lanouf would be a major victory for Gaddafi, re-establishing his power over a badly-damaged but vital oil facility and pushing his zone of control further along the main coastal road running from rebel territory to the capital, Tripoli. The rebel hospital in the eastern town of Brega said four were confirmed dead in the fighting, 35 were wounded and 65 were missing.
Germany said it froze billions in assets of the Libyan Central Bank and other state-run agencies. The US, UK, Switzerland, Austria and other countries have also frozen Gaddafi's assets.
In Tripoli, Gaddafi's son, Seif al-Islam, vowed to retake the eastern half of Libya, which has been in the opposition's hands since early in the three-week-old uprising.
"I have two words to our brothers and sisters in the east: We're coming," he told a cheering crowd of young supporters, depicting Libyans in the east as being held "hostage" by terrorists.