Rebel fighters are in control of the centre of the town of Zawiyah, about 50 km west of the Libyan capital, a Reuters reporter in Zawiyah said on Sunday.
The reporter said he could see about 50 rebels near Zawiyah's main produce market shouting "Allahu Akbar!," or "God is greatest!" The red, black and green rebel flag was flying from a shop.
Rebel fighters told Reuters there were still forces loyal to Libyan leader Muammar Gaddafi in the town, including snipers. The sound of occasional gunfire could be heard, but no heavy fighting.
Rebels said the capital was their next target. One rebel fighter smiled as he pointed to a road sign marking the highway from Zawiyah to Tripoli.
"I'm 1,000 percent sure we're going to take over Zawiyah today and then move on to Tripoli," said Bin Jaffin Ali, 34, a shopkeeper turned rebel fighter.
The rebel attack on Zawiyah, on Libya's Mediterranean coast, is the most dramatic advance into Gaddafi-controlled territory since the uprising against his rule began six months ago.
The fact that the rebels have advanced so close to Tripoli is likely to deliver a psychological blow to Gaddafi's supporters. The government in Tripoli on Saturday denied rebels were in control, saying it successfully repelled a small attack.
Zawiyah lies on the main highway between Tripoli and the border with Tunisia, so the rebel advance effectively cuts Tripoli off from its supply lifeline. The city could also be starved of the fuel produced by the oil refinery in Zawiyah.