(Adds UN envoy says sides far apart, Gaddafi comments)
* U.N. envoy has Tripoli meetings day after seeing rebels
* Government demands end to air strikes before negotiations
* Gaddafi’s fate is up to Libyans, say UK and France
By Missy Ryan
TRIPOLI, July 26 (Reuters) - A U.N envoy trying to find a way to end the war in Libya said after talks with the prime minister in Tripoli on Tuesday that the government and the rebels remained far apart in the drive for an end to the crisis.
The government told him NATO must end air strikes before any talks could begin and that Muammar Gaddafi’s role as leader was non-negotiable, though rebels and the West insist he step down.
Britain and France, carrying out most of the NATO bombing attacks, dropped their insistence that Gaddafi leave Libya as part of any settlement, in an apparent softening of their line.
A compromise appeared even more distant after Gaddafi called the rebels “traitors” and said they had no legitimacy, in a defiant audio speech aired live on Libyan television during a pro-government demonstration in Al Khums, 120 km (80 miles) east of Tripoli.
“Is there anyone who still pretends that he represents the Libyan people after millions came out and said ‘no’ to the traitors,” Gaddafi told several thousand supporters, who waved posters of him and chanted slogans demanding he stay in power.
The U.N. envoy, Abdul Elah al-Khatib, arrived in Tripoli straight from talks with rebels in their eastern stronghold of Benghazi on Monday.
He met Prime Minister Al-Baghdadi Ali Al-Mahmoudi who said they had a productive dialogue -- but about implementing U.N. resolutions, not negotiating an end to the five-month-old conflict in which neither side seems to have the upper hand.
“This aggression (air strikes) needs to stop immediately, without that we cannot have a dialogue, we cannot solve any problems in Libya,” Mahmoudi told a news conference afterwards.
Asked if he had told the envoy that Gaddafi’s position was not up for negotiation, he said: “Exactly.”
The United Nations said in a statement issued in New York that the two sides were still far apart on finding a political solution, but both said they wanted to continue to seek an end to the crisis through the United Nations.
In London, the British and French foreign ministers, William Hague and Alain Juppe, called again for Gaddafi to leave power but, on the matter of whether he could stay in Libya, both said it was up to Libyans to decide.
Britain said it had not changed policy but comments by Hague were interpreted as tacit backing for the proposal, floated last week by France, that Gaddafi could remain in Libya.
A rebel leader this week appeared to endorse the view, which would mark a major shift from previous rebel demands that he be tried for war crimes in The Hague.
Deadlines are approaching for the NATO-led alliance, whose U.N. mandate for military action -- granted on the grounds that it would protect civilians -- expires in two months.
Hopes an agreement could be reached before Ramadan have faded as the Muslim holy month gets nearer. It begins next week.
The poorly armed rebels hold a third of the country, mainly in the oil-rich east but also pockets like the Western Mountains near the capital and an enclave including the port of Misrata.
Hospitals in Misrata, the country’s third-biggest city, said three rebel fighters had died near the city on Monday and 11 were wounded in fighting on Tuesday.
In Tuesday’s speech, Gaddafi threatened to destroy Misrata if the rebels there did not surrender and called on his supporters to march toward the city to cleanse it of criminals.
The rebels have been unable to move decisively against Gaddafi, even with NATO support, and have accused neighbouring Algeria of helping his troops by turning a blind eye to a weapons shipment. Algiers denied letting arms be offloaded at one of its ports.
Italian Interior Minister Roberto Maroni said after talks in Rome with his Libyan rebel counterpart, Ahmed Hussein al-Darrat, that Italy had agreed to help the rebel government develop its security apparatus.
NATO has continued to hammer Gaddafi’s forces around Libya, striking twice in central Tripoli on Monday, and Britain has said there will be no let-up during Ramadan.
Gaddafi says he supports talks with the rebels and the West, but has shown no sign of agreeing to cede power after 41 years of unchallenged rule, much of it as a pariah in Western eyes.
In his talks with the Benghazi-based rebel leadership council, U.N. envoy Khatib discussed ideas for ending the war but said later a firm initiative had yet to take shape.
“We did not put a plan in front of them. We discussed the views and ideas on how we can trigger a political process ... to achieve a political solution,” he told Reuters.
He has said his ideas involve a ceasefire and, simultaneously, setting up a mechanism to manage the transitional period. He has not given details.
Senior rebel official Mahmoud Jibril said he had underlined that the rebels would accept only an initiative that involved the removal of Gaddafi from power as a first step to peace.
Rebel leaders have given conflicting signals in recent weeks over whether they would allow Gaddafi and his family to stay in Libya as part of a deal, providing he gave up power.
Rebel leader Mustafa Abdel Jalil told the Wall Street Journal that would be acceptable. “Gaddafi can stay in Libya but it will have conditions,” he said. “We will decide where he stays and who watches him. The same conditions will apply to his family”.
But the rebels seem unlikely to unseat him any time soon.
They said they had almost taken the oil town of Brega a week ago, but later said minefields had slowed their advance.
While rebels received a boost this week when Turkey sent a first cargo of fuel under a multi-million dollar supply deal, a government rocket attack cut fuel supplies in Misrata.
The Libyan news agency JANA said Foreign Minister Abdelati Obeidi was in Tunisia on Tuesday for talks with officials over “initiatives that were taken about what’s happening in Libya, chief of which is the African Union’s initiative”.
The AU plan does not insist on Gaddafi standing down. (Additional reporting by Souhail Karam in Rabat, Mussab Al-Khairalla in Misrata, Joseph Nasr in Berlin, Matt Falloon in London, and Ali Abdelatti in Cairo; Writing by Richard Meares and Joseph Nasr, editing by Tim Pearce)