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The alleged strike on a two-storey home in the suburbs of the town of Zlitan, 160 miles east of Tripoli, killed the wife and two children of Mustafa Naji, a physics teacher and sparked an eruption of local anger against the bombing campaign.
The regime of Libyan leader Col Muammar Gaddafi seized on the attack to press claims innocent locals have been killed by Nato's bombs.
Nato's efforts to assist advances by rebels from central Misurata have embroiled the alliance in an urban war for control control of Zlitan. Bombed schools and flattened food warehouses are now in evidence in the town and they are being used by Gaddafi loyalists as staging grounds for continued attacks on the rebel enclave.
Despite the use of fixed wing aircraft and helicopter gunships and despite rebel claims that the town had fallen earlier this week, fighting raged yesterday on Zlitan's eastern fringes. A handful of loud explosions were accompanied by the whine of jet engines on Nato aircraft.
The Naji home stood ten miles from the front line in the apparently quiet suburb of Kaim. Regime officials said the family were ordinary people who had feasted just hours before to celebrate the Muslim holy month of Ramadan. Its concrete floors had collapsed and the rooms were destroyed. By midmorning it was impossible to tell if the building had ever been used by Gaddafi's military unlike the nearby Law College and school where the bombed buildings were littered with military paraphernalia including combat fatigues and log books.
Ibtisam, the mother of two children, Mohammad 5 and Muttasim, 3, were buried within hours at an emotional funeral ceremony next to a local mosque.
"These people were not fighters, there is no military in this neighbourhood," said Ali Adil, a lawyer and neighbour. "Nato say they are protecting civilians but they are turning their weapons on us. The UN Security Council should investigate this." A nephew pulled off the funerary shrouds to reveal the bloodied faces of the dead.
"Those that are fighting with Nato are traitors against their country," said Mohammad Ali Berber, a cousin of the victim. "We should volunteer to go to the front line and finish it. We will never forgive." Nato bore the brunt of the blame for the attack.
Mr Adil said that he had seen helicopters in action attacking areas where there were no soldiers deployed. "It's an unfair war using this technology against us."
A Nato spokesman said the organisation had struck a target at 6.30am in Zlitan and that it was investigating the allegations of civilian casualties.
The UN Security Council resolution authorising the Nato campaign to use military air power to stop Col Gaddafi's regime killing his own people to crush a nationwide uprising.
Moussa Ibrahim, the Gaddafi regime spokesman, said the attack on Zlitan was one of many Nato atrocities. "Yet another crime of Nato against Libyan civilians has taken place," he said. "No one is safe from Nato." Despite Misurata rebels claims that they had taken the centre of Zlitan there has not yet been heavy downtown fighting.
But as the fighting has encroached, locals have fled elsewhere. Apartment blocks along the main boulevard, Sahili Rd, are deserted. Only a handful of shops remain open.
However the main impediment to the fall of the town is the hatred of local tribes towards Misuratans. The proximity of the two towns belies a deep-rooted antipathy.
Many local families are the descendants of slaves captured by the pirates that operated from Misurata in the 19th century.
"I have no friends or acquaintances from Misurata, I know nobody from there," said Khalifa Misha, a schools inspector. "They have no right to come here. We will resist this conquest until the last drop of blood."