The interim administration in Tripoli submitted a challenge to the ICC claiming Saif al-Islam Gadhafi, son of former leader Moammar Gadhafi, and former intelligence chief Abdullah al-Sanousi should be tried before the national courts.
Both are suspected of playing a role in the death of anti-government demonstrators and rebel forces during the war last year.
ICC Chief Prosecutor Luis Moreno-Ocampo told the U.N. Security Council that the court was considering Libya's appeal.
"The challenge goes to the heart of the system of justice established in 1998 by the Rome Statute: national states have the primary obligation to conduct proceedings and the International Criminal Court's intervention will be complementary," he said.
U.S. Ambassador to the United Nations Susan Rice said Tripoli is obligated under Security Council resolutions to cooperate with the ICC.
"Moreover, there is much work to be done domestically in Libya not only to account for the grave crimes committed in the past but also to ensure a functioning justice system for the future," she said.
The issue is before the pre-trial chamber at the court in The Hague. Observations are to be presented by June 4.