Libya's new regime fighters retreated under heavy fire from loyalists of Muammar Gaddafi  in his hometown of Sirte today as their leaders backtracked on an announcement they had captured one of his sons.

The advancing fighters, who had been hoping to mop up the last pockets of resistance in two residential neighbourhoods in the northwest of the city, withdrew at least two kilometres (more than a mile) to the central police headquarters they had captured on Tuesday, an AFP correspondent reported.

"We have been told to retreat to the police HQ and will be using artillery cannon to hit Gaddafi's forces," fighter Hamid Neji of the Martys of Free Libya Brigade told AFP on the new front line.

Before the reverse, a field commander of the brigade had told AFP that its fighters were trying to avoid using heavy weaponry against the Dollar and Number Two residential neighbourhoods to avoid civilian casualties.

"We are not going very aggressively into these neighbourhoods because there are still families inside them," commander Yahya al-Moghasabi said.

"The fighting has narrowed down to these two neighbourhoods," he had added. "We believe it will take another three days to capture them."

Sirte is a key goal for Libya's new leaders who have said they will not proclaim the country's liberation and begin preparing for the transition to an elected government until the city has fallen.

The new regime began its siege of Sirte on September 15 before launching what it termed a "final assault" last Friday that has seen at least 91 of its troops killed and hundreds wounded, according to medics.

The city's main square and waterfront are under the control of new regime fighters, along with its showpiece conference centre, university campus and and hospital.

But they have faced unexpectedly stiff resistance in the west of the city despite controlling the whole of the east.

A top adviser of National Transitional Council (NTC) chief Mustafa Abdel Jalil meanwhile backtracked on his announcement that new regime forces had captured Gaddafi's feared son and national security chief Mutassim in Sirte, after it was denied by military commanders in the city.

"There was some confusion about the reports of Mutassim's capture," Abdelkarim Bizama said.

"As soon as we have confirmation, there will be an official announcement of his arrest."

Late yesterday, Bizama had announced: "Mutassim Gaddafi was captured at Sirte and was transferred to Benghazi," Libya's second-largest city where significant parts of the new leadership remain based.

"We did not announce the capture earlier to avoid that (his family or aides) try to free him," he told AFP.

The announcement sparked celebratory gunfire in both Tripoli and the anti-Gaddafi stronghold of Misrata, Libya's third-largest city, which withstood a devastating siege by his forces during the uprising that ended his 42-year rule.

New regime fighters said they did capture the Gaddafi regime's top cleric as he attempted to flee Sirte on Wednesday with his beard shaved off to disguise his appearance.

Khaled Tantoosh, who served as the mufti of Libya underGaddafi , made broadcasts in support of the fugitive strongman through the long uprising that ended his 42-year rule.

"We captured him yesterday morning," said fighter Abdu Salam, who said he stopped the cleric's vehicle with four comrades on the coast road west out of Sirte.

"He had completely changed his appearance. He was clean-shaven and was driving out and trying to escape to Tripoli," he said.

NATO said its aircraft hit two military vehicles in Sirte yesterday and one more in the other remaining bastion of Gaddafi forces -- the desert oasis of Bani Walid, southeast of Tripoli.

NTC oil and finance minister Ali Tarhuni said Libya would not award any further oil contracts until an elected government has been formed.

"The only government that can give new concessions in oil is an elected government, and that would be after we have a constitution," he said.

Libya's oil production, which collapsed following the uprising in February, is expected to rise from current levels of around 400,000 barrels per day, to nearly one million by April, said Nuri Berruien, president of the state-run National Oil Company (NOC).

"We are shooting to go back to previous levels of 1.6-1.7 million, hopefully before the end of 2012," he said.