Libyan rebels say they are prepared to attack one of Moammar Gadhafi's last loyalist strongholds amid speculation that the embattled leader may be hiding in the desert town.

Bani Walid, a town 140 kilometres southeast of Tripoli, is home to the Warfala tribe -- one of the groups that Gadhafi has said will defend him to the death.

Thousands of rebel soldiers surrounded the town from three sides on Sunday, choking off communication and supply routes, said CTV's South Asia bureau chief Janis Mackey Frayer.

"They seem to be gearing for a fight for control," she told Â鶹´«Ã½ Channel in a phone interview from Misrata, Libya on Sunday.

Earlier in the day, the rebels attempted to avoid bloodshed by urging the town's tribal leaders to join their cause. The talks were held primarily with Moussa Ibrahim, Gadhafi's chief spokesman.

After an afternoon of negotiating, a rebel spokesperson outside Bani Walid confirmed that the town would not surrender peacefully. Abdullah Kanshil says that opposition fighters are currently stationed outside the town, waiting to launch an assault.

"We feel sorry for the people of Bani Walid," Kanshil, himself a native of the town, told reporters. "We hope for the best for our town."

Kanshil said negotiations broke down when Ibrahim demanded the rebels put down their weapons before entering the town.

The rebels say the loyalists in the town are heavily armed and have been stoking fear among the town's populace.

Gadhafi supporters are "claiming that (rebel) fighters will come and rape their women," Mubarak al-Saleh, the representative from Bani Walid to the rebels' transitional council, told The Associated Press.

"We are trying to assure people that the fighters are true Muslims who will not harm anybody except those whose hands are stained with blood."

Frayer stressed that this isn't the outcome the rebel fighters had hoped for.

"They don't want their revolution to end on a bloody note," she said.

The blockade around Bani Walid comes as rebel forces are moving forward with establishing their own government, but may hold off on declaring victory until their ousted dictator is captured.

The hunt for Gadhafi

Part of the rebels' interest in Bani Walid is also fuelled by rumours that Gadhafi may be hiding in the town, said Frayer.

Seif al-Islam, one of Gadhafi's sons, is also said to have fled to the town soon after Tripoli fell but apparently left for fear that townspeople would hand him over to the rebels. These reports, however, haven't been confirmed, warned Frayer.

Meanwhile, members of Libya's National Transitional Council (NTC) told Al Jazeera Television on Sunday that they know exactly where Gadhafi is hiding but did not reveal his presumed whereabouts.

Similar teases have been offered by loyalists. On Friday, a Gadhafi spokesperson told Reuters that the ousted leader is still in the country and surrounded by "many people who are prepared to protect him."

The Globe and Mail reporter Graeme Smith notes that despite what rebel or loyalist spokespeople say in the heat of battle, it's important to be critical about information coming out of Libya.

"We've heard a number of times over the last few weeks that the rebels have some idea of where Moammar Gadhafi is. Each time those reports have proven to be false," Smith told Â鶹´«Ã½ Channel on Sunday.

"At this point, to be honest, we don't know anything," he said in a phone interview from Tripoli.

The road ahead

Information on Gadhafi's whereabouts has proven to be just as uncertain as the eventual fate of the toppled dictator himself.

If Gadhafi is captured by rebel forces, Smith notes that it will prove to be a "litmus test" of Libya's transitional leadership.

"In theory, the transitional leadership says that they will arrest him and put him on trial," said Smith. "In practice, the hot-headed young men who form the hardcore frontlines may take justice into their own hands."

Amal Abuzgaya, a member of the Libyan Canadian Council, said she hopes that Gadhafi will be put on trial despite the fact that some are clamouring for his execution.

"If we're leaning towards a democratic and a just, future Libya…surrendering him to the international community and having him put on trial for what he's done is probably the most just way to go," she said from Â鶹´«Ã½ Channel's Toronto studio.

Rebel troops are also keeping close watch over Gadhafi's hometown of Sirte and the loyalist town of Sabha, deep in the Libyan desert.

With files from The Associated Press