London (CNN) -- The United Kingdom recognizes Libya's rebel umbrella group, not Moammar Gadhafi's regime, as that nation's legitimate government, Foreign Secretary William Hague said Wednesday.
"We are dealing with them as if they are the state of Libya and that is how we are treating them," Hague said of the Transitional National Council.
He said London is working on ways to thaw Libyan frozen assets and get the funds to the rebels.
His announcement came shortly after the Foreign Office said it had expelled all Libyan Embassy staff from the country.
The United States two weeks ago recognized the Transitional National Council as the "legitimate governing authority" in Libya.
Libyan Deputy Foreign Minister Khaled Kaim called Britain's step "irresponsible and illegal" as well as "unprecedented" in the history of international diplomacy.
"The objective and the aim of this step is to give more support and push to the rebels," he said. "But I tell the British government, they are flogging a dead horse. The rebels will not be benefited from this. It will be another illegal move but will not help them to achieve their criminal goals."
Later Wednesday, a rebel spokesman told CNN that rebel fighters may launch an offensive to take the town of Ghazzaia in the western mountains near Tunisia.
"Everything is possible, and we are ready to liberate Ghazzaia from Gadhafi forces," said Col. Jumma Ibrahim, spokesman for the military council.
Last week, rebel fighters manning hilltops in the western mountains overlooking Ghazzaia told CNN that they had been watching the government forces reinforcing their weapon stocks with heavy military machinery and rocket launchers.
Last month, rebel fighters suffered heavy casualties in a failed attempt to wrest control of Ghazzaia from Gadhafi forces.
In addition to announcing the recognition of the rebel council, Hague also blasted the appearance of Lockerbie bomber Abdelbeset Ali Mohmed al Megrahi on Libyan television overnight, saying that it proved his release from a Scottish prison in 2009 on the grounds that he did not have long to live was based on "worthless" medical advice.
Al Megrahi, the only person convicted for the 1988 bombing of Pan Am flight 103, which killed 270 people, was shown at a pro-Gadhafi forum in Tripoli on Tuesday afternoon.
Appearing frail, in a wheelchair and with a face mask under his chin, he was introduced to the rally as a victim of a conspiracy.
Hague on Wednesday reiterated his stance that Gadhafi could remain in Libya if he leaves power, but added that the best thing would be for him to face justice at the International Criminal Court, which is seeking his arrest.
After Hague first voiced that position on Monday, Al-Baghdadi al-Mahmoudi, prime minister of Gadhafi's government, said that the leader's future will be decided only by Libyans.
"With all due respect to the foreign minister of Great Britain, he cannot decide on behalf of the Libyan people," al-Mahmoudi said Tuesday. "What is important to us is what Libyans decide, not what William Hague decides."
Al-Mahmoudi also said Tuesday that NATO airstrikes must stop before any negotiations to resolve the five-month-old conflict can begin.
His statement came as the United Nations reported that a visit to the country by the secretary-general's special envoy to Libya found the government and the rebels "far apart on reaching agreement on a political solution."
CNN's Ivan Watson contributed to this report.