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Gaddafi's son Saif al-Islam told an Italian newspaper that the elections could be held within three months and transparency could be guaranteed through international observers.
He said his father would be ready to cede power if he lost the election, though he would not go into exile.
But Prime Minister Al-Baghdadi Ali Al-Mahmoudi appeared to throw the potential concession into question, saying on Thursday that the leader of the revolution was not concerned by "any referendum."
A visiting Russian envoy said the Libyan leadership had reiterated that Gaddafi's departure was a "red line."
The rebel leadership in the eastern stronghold of Benghazi rejected Gaddafi's son's election offer.
"We tell him (Saif al-Islam) that the time has passed because our rebels are at the outskirts of Tripoli, and they will join our people and rebels there to uproot the symbol of corruption and tyranny in Libya," rebel spokesman Abdel Hafiz Ghoga told .
A U.S. State Department official also dismissed the election idea, saying it was "a little late for that."
The proposal -- which follows a series of moves the Libyan leader's officials portray as concessions but Western powers dismiss as ploys -- comes at a time when frustration is mounting in some NATO states at slow military progress.
Rebel advances towards Tripoli have been slow, while weeks of NATO strikes pounding Gaddafi's compound and other targets have failed to end his 41-year-old rule.
In the latest raids, eight loud explosions were heard in southeast and southwest Tripoli late on Thursday and planes could be heard overhead. Libyan state television said NATO had hit targets in the Al-Ferjan district of the city.
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