Pro-Gaddafi forces have attacked the Libyan rebel stronghold of Benghazi and their tanks have entered the city, a BBC journalist witnessed.
A jet also appears to have been shot down over the city despite a declared ceasefire and a UN no-fly resolution.
World leaders are meeting in Paris to discuss military action.
A French military source was quoted as saying French aircraft were already conducting reconnaissance missions over Benghazi.
The rebel's leader has appealed to the international community to stop the pro-Gaddafi bombardment, but the government denies it is attacking.
Reports suggest hundreds of cars packed with people were fleeing the city eastwards as fighting spread.
"Now there is a bombardment by artillery and rockets on all districts of Benghazi," rebel leader Mustafa Abdul Jalil told Al Jazeera television. "There will be a catastrophe if the international community does not implement the resolutions of the UN Security Council.
UN Secretary General Ban Ki-moon says the world must "speak with one voice" on Libya.
The new UN resolution authorised "all necessary measures" to protect Libyan civilians.
Getting ready
The BBC's Ian Pannell saw the government tanks on a bridge inside Benghazi at around 1030 (0830 GMT).
Earlier, US President Barack Obama said forces loyal to Col Muammar Ghaddafi must stop attacking rebel areas or face military action.
"Gaddafi must stop his troops from advancing on Benghazi, pull them back from Ajdabiya, Misrata and Zawiya and establish water, electricity and gas supplies to all areas," he said on Friday.
Diplomatic sources suggest world powers could start launching air-strikes on Libya within hours.
On Friday, Col Gaddafi's government declared a unilateral truce but there were reports that government offensives in rebel-held towns were continuing, and our correspondent says gunfire was also heard coming from the sea.
A rebel spokesman was quoted as saying the downed jet was a rebel plane which had been shot down by pro-government forces.
The United Nations refugee agency says it is preparing to receive 200,000 people fleeing the fighting, amid reports of hundreds of cars full of people heading for the Egyptian border, while others are attempting to flee on foot.
The first families had arrived at the Egyptian border, extremely frightened and traumatised, saying some of their homes have been completely flattened said UNHCR spokeswoman Elizabeth Tan.
While officially, Libya's government claims it is respecting its ceasefire, on the ground a darker reality is emerging, says the BBC's Kevin Connolly in the eastern city of Tobruk:
Col Gaddafi may be using the interlude being the UN resolution being passed and its being implemented to punish rebels for their uprising before the West can intervene
The Libyan leader may also be seeking to conceal his armoured columns in the streets of Benghazi, making it infinitely harder for allied forces to attack them
But a Libyan government spokesman said there had been "no attacks whatsoever on Benghazi".
"As we said, we are observing the ceasefire and we want international observers to come," said the spokesman, Mussa Ibrahim.
Mr Ibrahim quoted a letter from Col Gaddafi to President Sarkozy of France, UK Prime Minister David Cameron and Mr Ban, saying the UN resolution had no authority because it was interfering in Libya's internal affairs.
The Security Council vote called for an immediate ceasefire, and endorsed using force and imposing a no-fly zone to protect civilians.
The British and French, along with some Arab allies, are expected to play a leading role in the enforcement of the resolution.
The French ambassador to the UN, Gerard Araud, told the BBC that he expected military intervention within hours of Saturday's summit.
Mr Cameron - who is scheduled to meet Mr Sarkozy and US Secretary of State Hillary Clinton ahead of the summit - has said British war planes are being moved to bases in the region.
Strength of outrage
Saturday's summit will be hosted by Mr Sarkozy. Mrs Clinton will represent the Obama administration while Arab nations expected to be represented include Jordan, Morocco, Qatar and the United Arab Emirates.
BBC diplomatic correspondent Bridget Kendall says it is a chance to demonstrate to the Gaddafi government, and to the rest of the world, the strength of outrage at his actions and the determination to stop him.
The US Navy is deploying additional warships to the Mediterranean to support possible military action.
The commander in charge of planning for the no-fly zone will be US Adm Samuel Locklear, the BBC's Mark Urban has learnt.
Denmark and Canada have said they will supply fighter jets, with Italy, Spain and France making air bases available.
Nato is already providing 24-hour surveillance over Libya with its Awacs planes.
Secretary-General Anders Fogh Rasmussen said Nato was "completing its planning to be ready to take appropriate action in support of the UN resolution as part of the broad international effort."
The US ambassador to the UN, Susan Rice, told CNN that Col Gaddafi was already in violation of the UN Security Council resolution.
Col Gaddafi has ruled Libya for more than 40 years.
An uprising against him began last month after long-time leaders of neighbouring Tunisia and Egypt were toppled.
