The rebels "have no hope, it`s now a lost cause for them," Kadhafi said in an interview with Italian daily Il Giornale, as his forces made major advances on the ground into formerly rebel-held territory in eastern Libya.
The rebels have "two choices: surrender or flee," he said, adding: "These terrorists are using civilians as human shields including women."
"If they surrender we will not kill them," he continued.
Kadhafi also ruled out any mediation with the rebels, saying: "It`s impossible to negotiate with terrorists linked to Osama Bin Laden.
"They themselves don`t believe in dialogue," he said.
The international community "doesn`t know what is really happening in Libya. The people are with me, the rest is propaganda," he continued.
He said the population of Benghazi was "afraid of these people and we must liberate them," he said. "The people are asking us to intervene."
Kadhafi said he was disappointed by Italy, Libya`s former colonial ruler and top trade partner, which has sided with the international community.
"I am so shocked. I feel betrayed," he said.
"The Libyan people should re-examine the economic and financial and security links with the West," he added.