Rebels in eastern Libya say their forces have been mistakenly hit in a Nato air raid on a rebel tank position.
Rebels said five died, while doctors in Ajdabiya told the BBC at least 13 rebel fighters had been killed in the strike.
The BBC's Wyre Davies reported chaotic scenes on the outskirts of Ajdabiya, with rebel forces in retreat.
It was the third such incident in recent days involving international forces deployed to protect Libyan civilians.
One rebel commander told the BBC he saw at least four missiles land among rebel fighters.
As well as those killed, many more were injured, he said.
Civilians were said to be fleeing Ajdabiya in their thousands, according to agency reports, after rumours spread that pro-Gaddafi forces were preparing to attack the city.
Meanwhile, a relief ship carrying emergency supplies of food and medicine has arrived in the besieged rebel-held city of Misrata, in western Libya.
The rebels hit in the air strike had been moving a group of tanks, armoured vehicles and rocket launchers near the frontline between the towns of Ajdabiya and Brega in more than 30 transporters.
There is considerable anger among rebel troops at what appears to have been a terrible mistake, our correspondent says.
They are asking why rebel units were hit, he adds, when they could be seen clearly advancing in a westerly direction towards the front line.
"It is unbelievable," said one Benghazi resident. "Nato, with all the equipment they have - is this the second mistake? Is it really a mistake or something arranged secretly?"
Another said: "The allies and the UN Security Council must allow us to be armed. We don't want anything, just to be armed to defend ourselves against this dictator and fascist."
Rebel forces in the area began retreating on Wednesday after heavy bombardment from government forces.
They had been calling for more Nato air strikes in recent days.
Nato said it was investigating the incident, noting that the area where the attack occurred was "unclear and fluid with mechanized weapons travelling in all directions".
"What remains clear is that Nato will continue to uphold the UN mandate and strike forces that can potentially cause harm to the civilian population of Libya," said the alliance in a statement.
Meanwhile, a different rebel spokesman said Thursday's fatal air strike was carried out by pro-government forces rather than by Nato.
"This was not a Nato air-strike; on the contrary, it was conducted by Gaddafi's brigades using SIAI Marchetti SF-260 planes," Col Ahmad Bani told al-Arabiya television.
The alliance took over air operations from a US, French and British coalition a week ago, to enforce a UN mandate to protect civilians in Libya.
Last Friday, at least 13 people were reportedly killed when a coalition plane fired on a rebel convoy between Brega and Ajdabiya.
Three medical students were among the dead.
The attack came after rebels reportedly fired an anti-aircraft gun.
In a separate incident, seven civilians died and 25 were hurt in a coalition air strike on a pro-Gaddafi convoy near Brega.
Further west, in Libya's third-biggest city, Misrata, a ship chartered by the UN World Food Programme delivered hundreds of tonnes of high energy biscuits, flour, and water purification tablets, as well as enough medicine to last 30,000 people for a month.
Misrata has been under attack by Libyan government forces for several weeks, and Libyan rebels have complained it would "cease to exist" within a week unless Nato took action to save it.
Meanwhile, Turkish Prime Minister Recep Tayyip Erdogan has defended his policy in Libya, after criticism by some Libyan rebels that Turkey was trying to keep Col Gaddafi in power and had blocked access to rebel arms supplies.
"We've never had any secret agenda there," said Mr Erdogan. "Our only interest is securing the unity and well-being of Libya".
Mr Erdogan added that Turkey was working on achieving an early ceasefire, and the withdrawal of pro-Gaddafi forces from some cities.