JOIN USA Libyan rebel spokesman said Gaddafi's forces had entered the city while a Reuters witness said rebels were erecting concrete barricades to defend their headquarters.
The fighting came despite a pledge by Libya's government that it was observing a ceasefire and as France predicted imminent military action by the West.
The Libyan government denied its forces were in action in or around Benghazi. A government spokesman said they were observing the ceasefire, blaming rebels for attacks.
As explosions shook Benghazi, rebel fighters said they were being forced to retreat from the outskirts of the city where the revolt against Gaddafi began a month ago.
A fighter jet was shot down over Benghazi on Saturday.
"I saw the plane circle around, come out of the clouds, head toward an apparent target, and then it was hit and went straight down in flames and a huge billow of black smoke went up," Reuters correspondent Angus MacSwan said.
"It seems it was attacking the Benghazi military barracks."
Rebels said Libyan jets had bombed the road to the Benghazi airport and elsewhere on the outskirts.
"They were 60 km (40 miles) away yesterday, today they are 20 km away and they can be here in a half hour to 90 minutes," rebel fighter Khalid Ahmed told Reuters at a rebel base on the western edge of the city.
The Libyan advance into Benghazi pre-empted an international meeting hosted by France on Saturday to discuss military intervention in Libya. The meeting will be attended by U.S. Secretary of State Hillary Clinton and Arab leaders.
Libya had declared a unilateral ceasefire on Friday after the U.N. Security Council authorized a no-fly zone over Libya.
But the United States accused Gaddafi of defying international demands for an immediate ceasefire, and France's U.N. envoy predicted military action within hours of the Paris meeting on Libya on Saturday.
"It's clear we have to move quickly," a French government source said, contacted after the reports of fighting in Benghazi.
Libyan rebels said they were being forced back by Gaddafi's forces. Black plumes of smoke could be seen on the road to the west of the city, a Reuters witness said.
"We have no hope in the Western forces," Ahmed, the rebel fighter, added as around him rebel forces pulled back from the advancing frontline.
Elsewhere in the city, rebels also reported skirmishes and strikes by Gaddafi forces.
"Fighter jets bombed the road to the airport and there's been an air strike on the Abu Hadi district on the outskirts," Mohammed Dwo, a hospital worker and a rebel supporter, told Reuters.
He was speaking at the scene of an apparent firefight between rebels and what they claimed were two mercenaries who had infiltrated the city and were driving in a car which they said contained a crate of hand grenades.
The two men, in civilian clothes, had been shot and killed and rebels produced blood-soaked identity papers they said showed them to be of Nigerian nationality.
"We were sitting here and we received gunfire from this vehicle then we opened fire and after that it crashed," rebel fighter Meri Dersi said.
LANDING BY BOAT
Jamal bin Nour, a member of a neighborhood watch group, told Reuters he had received a call to say government forces were landing by boat, but it was impossible to confirm the information.
The city has been so rife with rumors and hearsay that it is virtually impossible to verify due to lack of communications.
A unilateral ceasefire declared on Friday by the Libyan government appeared to have done little to convince outside powers to hold off on plans for air strikes to force an end to an increasingly bloody civil war.
Within hours of President Barack Obama saying the terms of a U.N. resolution meant to end fighting in Libya were non-negotiable, his U.N. envoy, Susan Rice, asked by CNN whether Gaddafi was in violation of these terms, said: "Yes, he is."
Gaddafi said there was no justification for the U.N. resolution.
"This is blatant colonialism. It does not have any justification. This will have serious consequences on the Mediterranean and on Europe," he said in comments reported by Al Jazeera television.
France, which along with Britain has been leading a drive for military intervention, will host a meeting on Saturday on Libya which will be attended by U.S. Secretary of State Hillary Clinton and Arab leaders.
"So I guess that after this summit, I think that in the coming hours, I think we will go to launch the military intervention," the French ambassador to the United Nations, Gerard Araud, told the BBC's Newsnight program.
Obama made clear any military action would aim to change conditions across Libya -- rather than just in the rebel-held east -- by calling on Gaddafi's forces to pull back from the western cities of Zawiyah and Misrata as well as from the east.
"All attacks against civilians must stop," Obama said, a day after the U.N. Security Council passed a resolution authorizing international military intervention.
"Gaddafi must stop his troops from advancing on Benghazi, pull them back from Ajdabiya, Misrata and Zawiyah, and establish water, electricity and gas supplies to all areas. Humanitarian assistance must be allowed to reach the people of Libya ...
"Let me be clear, these terms are not negotiable... If Gaddafi does not comply ... the resolution will be enforced through military action."
In Tripoli the government said there had been no bombing since it announced the ceasefire.
"We have had no bombardment of any kind since the ceasefire was declared," Deputy Foreign Minister Khaled Kaim told journalists when asked about reports of continued government operations in Misrata and other parts of the country.
Kaim said Libya was asking China, Germany, Malta and Turkey to send observers to monitor its adherence to the ceasefire.
French Foreign Minister Alain Juppe said on Friday everything was ready to launch military strikes in Libya.
The United States, after embarking on wars in Afghanistan and Iraq, had insisted it would participate in rather than lead any military action. Obama said the United States would not deploy ground troops in Libya.