New Zealand's Prime Minister says the Government will move to form diplomatic ties with the Transitional National Council in Libya.
Rebels seized control of much of the capital Tripoli on Sunday causing mass celebrations on the streets, but leader Muammar Gaddafi's forces are struggling to hold on to power.
World leaders are calling for the Libyan leader to stand down immediately to avoid further bloodshed.
John Key says he has been watching events unfold in the north African country with concern, but also hope, and believes Colonel Gaddafi has two options.
"He can choose to stay in Tripoli and fight to the end resulting in further unnecessary bloodshed, or he can acknowledge the legitimate demands of the majority of Libyans and leave the country. We sincerely hope he chooses the latter course."
The Prime Minister says New Zealand has consistently supported the United Nations and NATO-led action aimed at protecting innocent Libyans from attacks by pro-Gaddafi forces and is now ready to go a step further.
He says New Zealand's ambassador to Egypt will travel to the Libyan city of Benghazi to establish a working relationship with the Transitional National Council as the legitimate voice of the Libyan people.
Mr Key says all New Zealanders in Libya have been advised to leave the country, but he understands seven people have chosen to remain and they are in contact with the embassy in Cairo.
British Prime Minister David Cameron on Monday urged Colonel Gaddafi to stop fighting without conditions.
Mr Cameron also says he would like to see the Libyan leader face justice - but that his fate was in the hands of Libyan rebel leaders.
Earlier, US President Barack Obama said Colonel Gaddafi has to recognise that he no longer controls his country and has to relinquish power once and for all.
A NATO spokesperson says the Libyan government is crumbling and Colonel Gaddafi should now realise he can not win the war.
However, South Africa, which has close ties with the Libyan regime, says it will not recognise a rebel government.