Gaining control of Zawiya would be crucial to Colonel Gaddafi's effort to defend his stronghold in Tripoli, correspondents say.
Reports from the coastal city said it had come under attack from both east and west from well-armed government forces in large numbers of tanks and armoured vehicles.
Heavy gunfire was heard in the central square as the rebels fought back using tanks they had captured earlier.
The tanks had circled the area in preparation for the fresh attack, shelling central areas of the city, where fires are burning under a cloud of dense black smoke.
Earlier, Zawiya resident and rebel supporter Mohammed told the BBC that pro-Gaddafi troops "came from east and west and they took up positions in high-rise buildings... and started shooting".
He said some tanks were captured and burnt near the town square, and that there were jubilant celebrations from the rebels as the pro-Gaddafi forces fled.
Another Zawiya resident, Hussein, said many civilians had been killed, including women and children - as up to 40 cars filled with soldiers attacked backed up by tanks and anti-aircraft guns.
"There are people dying everywhere. It is a disaster what is happening in Zawiya. We really need some help," Hussein told the BBC.
A doctor in the city said at least 30 people had died in the fighting
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