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68-year-old Gaddafi, whose forces have launched a bloody crackdown against protesters, addressed a crowd of his supporters in Tripoli`s Green Square.
"We can defeat any aggression if necessary and arm the people," he said yesterday, in footage aired on Libyan state TV.
"I am in the middle of the people.. we will fight ... we will defeat them if they want .. we will defeat any foreign aggression," said Gaddafi, who is facing the unprecedented two-week revolt against his 41-year rule.
His address came as the violence flared up in his bastion Tripoli, with security forces loyal to Gaddafi firing indiscriminately on thousands of demonstrators after the Friday prayers yesterday.
In his most aggressive action against Libya since the violence began, US President Barack Obama issued an executive order announcing unilateral sanctions on the country freezing the assets in America of Gaddafi, his family and loyalists.
"By any measure, Muammar el-Gaddafi`s government has violated international norms and common decency and must be held accountable," Obama said in a statement after he issued the executive order late last night.
"These sanctions therefore target the Gaddafi government, while protecting the assets that belong to the people of Libya," he said.
The executive order blocks the property and interests in property of a number of individuals, including the family members of the Libyan leader, officials of the Libyan Government and those responsible for human rights violations in that country.
The US also suspended its military ties with Libya and closed down its embassy in Tripoli.
"The State Department has suspended embassy operations in Libya and will temporarily withdraw all embassy employees from Tripoli," White House Press Secretary Jay Carney told reporters.
The US action came just minutes after a charter flight left Tripoli carrying the last Americans who wanted to leave Libya.
"It`s clear that Colonel Gaddafi has lost the confidence of his people," Carney said.
UN chief Ban Ki-moon, addressing an emergency session of the Security Council on Libya last night, said the estimated death toll in the violence in the strife-torn country had crossed 1,000.
"It is time for the Security Council to consider concrete action," he said, adding the loss of time means more loss of lives.
Earlier, at a hastily called news conference at the UN, Libyan deputy ambassador Ibrahim Dabbashi described Gaddafi as a "madman" and warned that thousands would die in Tripoli because the Libyan leader would never flee and fight to the end.
There was heavy gunfire in various Tripoli districts, including Fashloum, Ashour, Jumhouria and Souq Al, yesterday.
"The security forces fired indiscriminately on the demonstrators," a resident of one of the capital`s eastern suburbs was quoted as saying by Al-Jazeera. "There were deaths in the streets of Sug al-Jomaa."
Six people were killed yesterday in the first protest in several days in Tripoli after demonstrators took to the streets undeterred by the fierce clampdown, the channel said,
Around Tripoli, an elite brigade commanded by Gaddafi`s son Khamis is believed to be dug in amid a heavy security presence in the city`s mosques in recent days.
Meanwhile, the 27-nation European Union has reached consensus on imposing tough sanctions against Libya and is expected to strike an agreement in this regard next week in the wake of violent crackdown by the Gaddafi regime on protesters demanding an end to his authoritarian rule.
A formal agreement on imposing a set of tough sanctions will be hammered out next week, German Foreign Ministry officials here and EU diplomats in Brussels said yesterday.
The UN Human Rights Council in Geneva unanimously passed a resolution recommending suspension of Libya from the body and decided to conduct an independent probe into violations by the Gaddafi regime.
The 47-nation body`s recommendation to suspend Libya needs to be approved by a two-thirds majority at the 192-member United Nations General Assembly in New York.
The UN`s top rights body also decided to "urgently dispatch an independent, international commission of inquiry... to investigate all alleged violations of international human rights law in Libya."
