London: Britain on Wednesday recognized the Libyan rebel movement as the country`s legitimate government and swiftly unblocked 91 million pounds in frozen assets.
It also invited the opposition to replace diplomats of Muammar Gaddafi`s government in London, who have been expelled.
The move was announced after a United Nations peace envoy left Libya having spoken to both sides but apparently failing to make a breakthrough in ending the five-month uprising against Gaddafi`s 41-year rule.
The United States and some 25 other nations have also recognized the Benghazi-based opposition, potentially freeing up billions of dollars in frozen funds. Russia, however, has criticized such moves, accusing nations of pursuing a "policy of isolation" and taking sides in a civil war.
Meanwhile, the International Criminal Court, which has issued an arrest warrant for Gaddafi and two of his sons, said "justice must be done" irrespective of any political agreement.
The ICC comments follow Britain and France dropping their calls for Gaddafi to quit power and leave the country -- seemingly part of a new diplomatic push to end the war as the rebels struggle to make significant gains on the battlefield, despite four months of NATO bombing of Gaddafi`s forces.
British Foreign Secretary William Hague, confirming London`s recognition of the rebels, said: "This decision reflects the National Transitional Council`s increasing legitimacy, competence and success in reaching out to Libyans across the country."
Hague said London would invite the council to replace Libya`s diplomats in Britain and free up some funds currently blocked due to an asset freeze on Libyan funds.
"At the request of the Arabian Gulf Oil Company, a Libyan oil company, the United Kingdom is ready to make available 91 million pounds of the company`s assets in the United Kingdom."
The rebels have long called on nations to give the administration in Benghazi access to Libyan assets frozen abroad so they can cover the daily costs of running the east of the country, which they now control.
They won $1.1 billion at a donor conference in June and received a further boost this week when Turkey dispatched the first cargo of fuel in a multi-million dollar supply deal.
But their fighters remain poorly armed and often disorganized.
Despite four months of NATO air strikes on pro-Gaddafi forces, the rebels have failed to make a big gains toward Tripoli and appear unlikely to make a breakthrough before the start in early August of the Muslim holy month of Ramadan.
"JUSTICE MUST BE DONE"
Nor has flurry of diplomatic activity in recent weeks -- with UN envoy Abdul Elah al-Khatib visiting both sides this week and Western nations easing demands that Gaddafi leave the country -- yielded results yet.
There had been some speculation that talk of allowing Gaddafi to remain in Libya may also pave the way for ICC to reconsider the charges of crimes against humanity leveled against Gaddafi, his son and intelligence chief.
But ICC official Fadi el-Abdallah said that although the court cannot comment on political action, warrants of arrest have already been issued against Gaddafi, Saif al-Islam, his son, and intelligence chief Abdullah al-Senussi.
"A political agreement does not affect the legal obligations or the judicial process. Justice must be done, in accordance with the rules of the Rome Statute (the ICC`s found treaty)," el-Abdallah said.
The United Nations said late on Tuesday that the two sides remained far apart on finding a political solution, a verdict underlined by Gaddafi`s camp calling for an end to air strikes before any talks can begin.