(AFP) - Libya's new unity government was thrown into chaos on Wednesday, as the head of its rival Tripoli-based authority refused to cede power.

Contradicting an earlier announcement that his so-called National Salvation Government was ready to step aside, Tripoli's unrecognised prime minister Khalifa Ghweil urged his ministers not to stand down.

"Given the requirements of public interest... you are requested to continue your mission in accordance with the law," he said, threatening to prosecute anyone working with the new government.

The reason for the U-turn was not immediately clear, but suggests a split within the Tripoli authority that seized the city two years ago forcing out the internationally recognised government.

The move derails a United Nations push to end the instability that has ripped Libya apart for five years, the day before its envoy Martin Kobler reports to the Security Council on his progress.

There was no immediate reaction from prime minister-designate Fayez al-Sarraj's administration, which had appeared to be cementing its control over the country's finances and institutions.

Ghweil's administration seized Tripoli in mid-2014 with the support of powerful militias, forcing the government backed by the international community to flee to the country's far east.

An attempt by his authority to hold on to power in the capital could spark fresh unrest in a country already struggling since Moamer Kadhafi was ousted in 2011.

Sarraj's Government of National Accord was created under a power-sharing deal agreed by rival lawmakers in December.

He arrived in Tripoli under escort by sea last week, established his headquarters at a naval base and had been moving to bolster his authority.

- 'Deeds must follow words' -

The international community has pleaded with Libya's warring sides to stand behind the unity government, which is seen as vital to tackling a jihadist expansion and rampant people-smuggling in the North African state.

But it has not yet been endorsed by the administration based in Libya's far east, which was appointed by the parliament elected in the last polls in 2014.

The Tripoli authority's reversal will be seen as a major setback, after it said Tuesday it would end its activities as a legislative power to "prevent bloodshed and divisions".

Earlier Wednesday, Italian Foreign Minister Paolo Gentiloni had said recent developments were "encouraging" in moving towards a "united, stable and secure Libya".

"I hope that the spirit of compromise prevails on all parties involved," he said in a statement, offering the full support of Italy, the former colonial power in Libya, to the new government.

Before the U-turn, Sarraj's GNA had ordered all government ministries, institutions and committees to respect its authority and use its logo.

It also ordered the Central Bank and the Audit Bureau to freeze all state accounts immediately, except for salary payments to government employees.

- Sarraj 'still fragile' -

Kobler held talks with Sarraj on Tuesday in the UN envoy's first visit to the capital since the new government arrived.

Kobler has praised the "courage and determination" of the unity government and said the UN was ready to provide "all the support needed" towards an "immediate and peaceful handover of power".

The new administration had in recent days been broadening its support, winning the backing of the Libyan Investment Authority, the National Oil Corporation and the Central Bank.

Arturo Varvelli, a Libya specialist at the Milan-based Institute for the Study of International Politics, said the Central Bank's support was vital for Sarraj as it allows his government to "grant or stop funding... various militias".

With control of public finances, the flow of funds "can be turned on and off like a tap", he said.

Western governments are deeply concerned that Libya's disarray has allowed the jihadist Islamic State group to gain an important foothold in the country, but have said a foreign intervention can only take place at the request of a unity government.

"Sarraj's political stature is still very fragile," said Silvia Colombo, a Libya specialist at Rome's Institute of International Affairs.

"But the threat of IS has played a role in creating a more favourable climate" for his administration, she said.

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