Tribal and political leaders in the eastern city of Benghazi declared they would form an autonomous government while leaving foreign policy, energy and military matters in the hands of the central government in Tripoli.
Libyan leader Mustafa Abdel Jalil described the declaration as a move by "some Arab nations" to begin a conspiracy against the Libyan people.
"(Benghazi leaders) should know that there are infiltrators and remnants of (Moammar) Gadhafi's regime trying to exploit them now and we are ready to deter them, even with force," he was quoted by al-Jazeera as saying.
He warned of efforts to divide a post-revolution Libya, but acknowledged the important role Benghazi had in regime change. The eastern city, part of a historical federal district called Cyrenaica, was the sight of the first demonstrations against Gadhafi's government in February 2011.
In the 1950s, Libya was divided into Cyrenaica, Tripolitania and Fezzan, three semi-autonomous states.