* Govt forces step up shelling of western town
* Residents flee for safety; rebels say one fighter killed
* Town is one last remaining rebel holdouts in western Libya
(adds escalated attack, new quotes)
By Mariam Karouny
TUNIS, March 14 (Reuters) - Forces loyal to Muammar Gaddafi stepped up their shelling of the small western town of Zuwarah on Monday, attacking even private homes and sending people fleeing for safety, residents said.
The loyalists launched their drive to retake one of the last rebel holdouts in western Libya earlier in the day. Zuwarah is a coastal town of 40,000 people 120 km (70 miles) west of Tripoli and near the border with Tunisia.
“They have attacked now. It’s a strong attack and they’re bombing everything in town, including houses,” insurgent fighter Abu Zeid said. “We are defending ourselves but we can’t do it for long. There are not enough weapons. It’s very bad here now.”
A resident named Tarek Abdallah had earlier said the Gaddafi forces were closing in from the east, west and south.
“They are firing artillery shells. The shops are closed, people are terrified. There is no life in Zuwarah right now,” he said. “I do not think we will hold on for long because there aren’t that many of us, but the rebels went to try to defend the town anyway.”
Another resident, Waleed, said: “We are hiding in our houses, we are very scared. How can they do something like that to us? We are Libyans like them.”
One rebel fighter was killed and many wounded, insurgent Abu Zeid said. “They came in military vehicles and started shooting at us,” he said. “We do not have weapons, we are fighting with whatever we can find here. God knows what will happen to us.”
There were reports of fighting in Zuwarah at the start of the insurrection against Gaddafi’s four-decade rule last month but since then there had been no news from the town.
Gaddafi’s forces initially lost control over large swathes of the oil exporting North African country, but over the past week, military momentum has shifted back in their favour.
His forces have stamped out a rebellion in Zawiyah, 50 km (30 miles) west of Tripoli and pushed insurgents in the east back from the oil towns of Ras Lanuf and Brega.
The only major city held by insurgents in the west is Misrata, 200 km (130 miles) east of the capital.
Rebels and residents there have reported that an assault on the city had been held up by a mutiny within the ranks of the besieging government forces.
“The fighting has stopped now. Early on Monday we heard five shells after a fierce night of fighting and now it has stopped,” Mohammed, a resident of Misrata, told Reuters by telephone.
“We are not sure why it has stopped. Maybe they got tired or maybe one group won over the other. Things are not clear.”
The government has denied the reports, which could not be verified independently because Libyan authorities have not allowed reporters access to the city.
Writing by Silvia Aloisi and Tom Heneghan; editing by Giles Elgood