Pressure is growing from some quarters in Nato to find a political solution, three months into a military campaign that has cost alliance members billions of dollars, killed civilians and, so far, failed to topple Gaddafi.
Moussa Ibrahim, a spokesman for Gaddafi's administration, told reporters in Tripoli the government was proposing a period of national dialogue and an election overseen by the United Nations and the African Union.
"If the Libyan people decide Gaddafi should leave, he will leave. If the people decide he should stay, he will stay," Ibrahim said.
But he said Gaddafi - who has run the oil-producing country since taking over in a military coup in 1969 - would not go into exile, whatever happened.
"Gaddafi is not going anywhere, he is staying in this country," Ibrahim said.
The idea of holding an election was first raised earlier this month by one of Gaddafi's sons, Saif al-Islam.
The proposal lost momentum when Libyan Prime Minister Al-Baghdadi Ali al-Mahmoudi appeared to dismiss it. At the time, it was also rejected by anti-Gaddafi rebels in the east of Libya, and by Washington.
Many analysts say Gaddafi and his family have no intention of relinquishing power.
Instead, they say, he is holding out the possibility of a deal to try to widen cracks that have been emerging in the alliance.
The election proposal could find a more receptive audience this time, especially after a Nato bomb landed on a house in Tripoli on June 19, killing several civilians.
After the incident, alliance member Italy said it wanted a political settlement because civilian casualties threatened Nato's credibility.
Libyan government forces have been fighting rebels backed by Nato air power since February 17, when thousands of people rose up in a rebellion against Gaddafi's rule.
The revolt has turned into the bloodiest of the Arab Spring uprisings sweeping the Middle East and Africa.
Rebels now control the eastern third of the country and some enclaves in the west.
But they have been unable to break through to the capital, leaving Western powers banking on an uprising in Tripoli to overthrow Gaddafi.
The Libyan leader suffered a propaganda defeat when four members of the national soccer team and 13 other football figures defected to the rebels, the rebel council said.
Libyans are passionate about the sport and the national team was closely aligned with Gaddafi's rule.
At one point his son, Saadi, played in the side.
(via Times LIVE)