Ashur Shamis, a Libyan opposition activist in London, and witnesses said the protest began Tuesday and lasted until the early hours Wednesday in the port city of Benghazi.
Demonstrators chanted "no God but Allah, Moammar is the enemy of Allah" and "Down, down to corruption and to the corrupt."
Police and armed government backers quickly clamped down on the protesters, firing rubber bullets, Shami said.
The outbreak of protests in Tunisia, Egypt, Yemen, Bahrain and Iran has roiled the Middle East and brought unprecedented pressure on leaders like Gadhafi who have held virtually unchecked power for decades.
It also posed new challenges for the United States, which has strategic interests in each of the countries. President Barack Obama conceded Tuesday he is concerned about the region's stability and prodded governments to get out ahead of the change.
As in the uprisings that toppled longtime autocratic rulers in two countries flanking Libya - Egypt and Tunisia - Libyan activists are used social networking websites like Facebook and Twitter to rally people in their homeland. They called for a major protest on Thursday.
Libya's official news agency did not carry any word of the anti-government protests. It reported only that supporters of Gadhafi were demonstrating Wednesday in the capital, Tripoli, as well as Benghazi and other cities.
JANA , the official news agency, quoted a statement from the pro-Gadhafi demonstrators as pledging to "defend the leader and the revolution." The statement described the anti-government protesters as "cowards and traitors."
Gadhafi, long reviled in the West, has been trying to bring his country out of isolation, announcing in 2003 that he was abandoning his program for weapons of mass destruction, renouncing terrorism and compensating victims of the 1986 La Belle disco bombing in Berlin and the 1988 bombing of a Pan Am airliner over Lockerbie, Scotland.
Those decisions opened the door for warmer relations with the West and the lifting of U.N. and U.S. sanctions, but Gadhafi continues to face allegations of human rights violations in the North African nation.
The protesters Tuesday and early Wednesday apparently were provoked by the failure of talks between the government and a committee representing families of hundreds of inmates killed when security forces opened fire during 1996 riots at Abu Salim, Libya's most notorious prison. The government has begun to pay families compensation, but the committee is demanding prosecution of those responsible.
But the protesters - buoyed by uprisings that toppled Tunisian President Zine Al Abidine Ben Ali and Egyptian President Hosni Mubarak - didn't limit themselves to the singular issue and instead called for more far-reaching political and economic reforms.
Protesters chanted slogans against Gadhafi as well as Prime Minister Baghdadi al-Mahmoudi, according to witnesses and videos posted on the Internet.
The government also planned to free Wednesday 110 Islamic militants who were members of a group plotting to overthrow Gadhafi, although it was not clear if the release would occur as scheduled in the wake of the protests.
A Libyan security official, speaking on condition of anonymity because he wasn't authorized to release the information, said 14 people, including 10 policemen, had been injured in clashes Tuesday. He said protesters were armed with knives and stones and police tried to disperse the crowd using water cannons.
The protests occurred after several opposition groups in exile called on Monday for Gadhafi's overthrow and for a peaceful transition of power. "Col. Gadhafi and all his family members should relinquish powers," the groups said in a statement.
Independent confirmation was not possible as the government keeps tight control over the media, but one video clip dated Feb.
15 and posted on a website called "Libya Uprising Today" website showed protesters carrying signs and chanting: "No God but Allah, Moammar is the enemy of Allah."
Another video with the same date showed a gathering running away from gunfire while shots being heard in the video. A young man in a white, bloodstained robe was then shown being carried by protesters.
The protests scheduled for Thursday were to commemorate the fifth anniversary of the day in which nine people were killed while holding a demonstration in front of the Italian Consulate against cartoon depicting Islam's Prophet Muhammad.
A third video showed a call for uprising against the repression and humiliation on Feb. 17, 2006. It was subtitled "freedom to the Libyan people" and showed footage from Egypt's protests along with lists of Libyans who had been killed in previous protests.
"The people want the execution of the leader," it said.
Gadhafi came to power 1969 through a military coup and since then he has been ruling the country with no parliament or constitution. Although Gadhafi claims he is only a revolutionary leader with no official status, he holds absolute power.
The opposition groups say that in practice he has direct control of the country's politics and its military and security forces.
There have been reports that Gadhafi's security forces have arrested several of these Internet activists.
"What happened in Egypt and Tunisia, inspired the youth," Shamis said.
Those expected to be released Wednesday were members of the Libyan Islamic Fighting Group, which is suspected of having links to al-Qaida, claimed responsibility for a failed assassination attempt against Gadhafi in 1995. The detainees to be freed reportedly included the brother of Abu Yahia al-Libi, an al-Qaida commander who escaped from Afghanistan's Bagram prison in 2005.
Seif al-Islam Gadhafi, the leader's son, has orchestrated the release of members of the group in the past as part of a reconciliation plan.