TRIPOLI - Libya's rebel leaders said that negotiations over the peaceful hand-over of the town of Bani Walid, 150 km southeast of the capital Tripoli, have collapsed and fighters have surrounded the city, Al-Jazeera TV reported Monday.

Libyan rebels on Monday exchanged fire with forces loyal to embattled Libyan leader Muammar Gadhafi as they advanced closer to the besieged city of Bani Walid, and were awaiting orders to launch their final attack after negotiations over its surrender collapsed.

Chief negotiator of the National Transitional Council (NTC) Abdallah Kanshil gave a deadline for Bani Walid inhabitants to raise the white flag by Sunday at 10:00 a.m. (0800 GMT) or face an all-out attack.

Bani Walid is the heartland of the powerful Warfalla tribe, which made up the core of Gadhafi's army and was given top political positions within the regime.

The town, along with Sirte on the Mediterranean coast and Sabha deep in the Sahara desert, are the last pockets of support for Gadhafi.

Saadi Gadhafi, one of Gadhafi's sons, said the talks' failure was the fault of his high-profile brother Seif al-Islam, who is wanted by the International Criminal Court along with their father for suspected crimes against humanity during the unrest.

Saadi said that an "aggressive" speech broadcast by his brother a few days ago had led to the breakdown of the negotiations.