Speaking live on state television, Gaddafi again blamed Al Qaeda for the challenge to his 41 year iron fisted rule, saying the objective was to control Libya's land and oil, and promised to fight to the last man and woman.
He denied that there have been any peaceful demonstrations since the uprising began in Libya on February 15 this year and challenged calls from home and abroad for him to step down, saying he has "no real power."
"Sleeper cells from Al Qaeda, its elements, infiltrated gradually ... They believe the world is theirs, they fight everywhere, the intelligence services know them by name," he told a ceremony of loyalists in the capital Tripoli.
"Suddenly it started in (the eastern town of) Al-Baida... The sleeping cell was told to attack the battalion ... and it took arms from police stations," said Gaddafi.
"The soldiers went home and left their battalion" while the Al Qaeda cells "took the weapons and control of the town."
"The women fled ... bullets were everywhere. It was the same situation in Benghazi," he said of the main eastern city under the control of the rebel forces.
"There are no peaceful demonstrations in Libya," he said. "If there were why are foreigners fleeing, the embassies closing in Tripoli, (oil company) employees fleeing from the desert?"
Turning to the oil industry, he said "these gangs made oil companies afraid, flee and stop production. Oil production is at its lowest." "The conspiracy has become clear," he said, claiming that the aim is to take control Libyan land and oil.
"This is impossible, impossible. We will fight to the end, to the last man, the last woman ... with God's help."
Libya has the largest oil reserves in Africa and is the continent's fourth largest producer, and Gaddafi said the "oilfields are safe and under control, but the foreign firms are afraid."
Gaddafi claimed that the people of the eastern city of Benghazi, which has played a key role in the rebellion, "have asked us to help them get rid from the armed gangs."
The ceremony was aired live shortly after rebels said they had repelled an attack by Gaddafi's forces in the eastern town of Brega on Wednesday, with witnesses reporting two civilians killed.
The event was to mark the anniversary of the launch of the People's Committees, according to the broadcaster. Reading from a prepared text, Gaddafi's speech was frequently interrupted by chants of support, which he praised.
One woman in a black robe and headscarf broke shouting "you are a sword that does not break. You are capable." Another person said: "Here is your leader, your beloved ... Here is the leader Muammar Gaddafi, the leader of victory and challenge, standing among his sons, steadfast, like our mountains, great like the greatness of our people."
Gaddafi criticised media reports about the resignations of senior officials from his regime including several military leaders and ambassadors abroad.
"The resignations from abroad, the statements from inside (Libya) ... don't believe them," he said. "As far as Libya is concerned ... nothing happened ... and it is strange that the world received news from correspondents and TV stations not present in Libya." "They dont want any real news from Libya," Gaddafi said, before adding that "there are no political prisoners in Libya at all."
"The Libyan people challenge ... even Muammar Gaddafi who has no power," said Gaddafi, who rose to power after overthrowing the monarchy in a 1969 coup.
"When the People's Committees issue something, it becomes law and is implemented for all Libyans. No one can declare war or peace unless the People's Committees decide," the Libyan leader said. "Muammar has no real power to surrender."
Gaddafi urged the international community to establish a commission of inquiry into the estimated deaths of more than 1,000 people killed in the unrest by his forces. "We urge the world, the United Nations, to see where the people were killed, to send a fact-finding team to investigate."
He also lashed out a moves by several countries to freeze Libyan assets. "The assets are the assets of the Libyan nation" and they have "no right" to seize them. "I am the asset of Libya, not the American dollar."
Gaddafi remains entrenched in Tripoli in the west of the oil rich North African country.