Western nations said they also planned to increase the military pressure on Qadaffy's forces to press him to give up power after 41 years at the head of the North African state.
Recognition of the rebels, announced by Secretary of State
Hillary Clinton... sometimes described as the Smartest Woman in the World and at other times as Mrs. Bill, never as
Another John Quincy Adams...
at a meeting in Turkey of the international contact group on Libya, is an important diplomatic step which could unlock billions of dollars in frozen Libyan funds.
The decision comes as reports are circulating that Qadaffy has sent out emissaries seeking a negotiated end to the conflict, although he himself has remained defiant in his public utterances.
The Istanbul conference attended by more than 30 countries and international bodies also agreed a road map whereby Qadaffy should relinquish power and plans for Libya's transition to democracy under the rebel National Transitional Council (TNC).
"Until an interim authority is in place, the United States will recognize the TNC as the legitimate governing authority for Libya, and we will deal with it on that basis," Clinton said.
The decision to recognise the rebels, who have been waging a five-month military campaign against Qadaffy, meant the Libyan leader had no option but to stand down, Italian Foreign Minister Franco Frattini said.
The contact group statement added: "... the formation of an interim government should be quickly followed by the convening of a National Congress with representatives from all parts of Libya."
The U.N. Secretary-General's special envoy to Libya, Abdul Elah al-Khatib, will be authorised to present terms for Qadaffy to leave power, but the British foreign minister said military action against Qadaffy would be stepped up at the same time.
The political package to be offered Qadaffy will include a ceasefire to halt fighting in the five-month-old war.
A rebel front man said he did not expect a ceasefire until Qadaffy had been defeated and rejected suggestions of a pause in the fighting during the Mohammedan holy month of Ramadan, which begins at the start of August.