Forces loyal to Libya's interim authorities say they have entered Bani Walid, one of the last towns still loyal to Col. Muammar Gaddafi.
NTC military commanders said they met heavy resistance from Gaddafi loyalists in the town, some 170kilometres (110 miles) southeast of Tripoli.
Meanwhile, fighting is continuing for Col. Gaddafi's hometown of Sirte.
In Tripoli, bulldozers have begun to demolish Col. Gaddafi's fortress-like Bab al-Aziziya compound.
Interim leaders said it was time "to tear down the symbol of tyranny".
National Transitional Council (NTC) commanders say troops have launched a fresh assault on the desert town of Bani Walid, but the extent of their advance into the desert town remains unclear.
Fighters approached the town on Sunday from the north and south after launching a barrage of artillery fire against the positions of pro-Gaddafi fighters, according to the Agence France-Presse news agency.
"We attacked this morning from the southwest. Our men were inside the town this afternoon. But there was heavy resistance" from the Gaddafi loyalists, NTC commander Jamal Salem told the news agency.
Some reports said the NTC forces reached the city centre, but these have not been verified.
While NTC forces surround Bani Walid, they have so far been unable to make a successful advance into the town due to resistance from some 1,500 Gaddafi loyalists believed to be there.
Last week, troops were pulled back after suffering heavy losses.
Along with Sirte, Bani Walid is one of only two remaining towns in Libya resisting the rule of the NTC.
In Sirte, commanders have been reorganising their forces in an attempt to prevent friendly fire, which some say is slowing their advance.
The BBC's Wyre Davies in Sirte said on Sunday there had been an attempt to co-ordinate the assault with fighters from Misrata in the west told to hold their positions, while troops from Benghazi in the east tried to take ground in the city centre.
However, the situation is chaotic and violent, he adds.
At one point the BBC team in Sirte came under heavy sniper fire and a young Libyan nearby was shot dead as they dived for cover.
As the fighting continues, the NTC is struggling to exert its authority over the country.
There have been reports of widespread looting by fighters around Sirte, with witnesses saying truckloads of stolen goods are being driven away.
Reporters from Associated Press TV said they saw trucks loaded with everything from tractors and heavy machinery to rugs, freezers, furniture and other household goods being driven off.
Meanwhile, NTC forces have bulldozed the green walls surrounding Muammar Gaddafi's main Tripoli compound. In Tripoli, senior army officer Ahmad Ghargory said the Bab al-Aziziya area would be turned into a public park. "It's the revolutionary decision to tear down this symbol of tyranny," he said.
"We were busy with the war, but now we have the space to do this." Correspondents say local people have already turned a courtyard, from where Col. Gaddafi once made fiery speeches, into a weekly pet market.