Cameron told the House of Commons last night that Britain and its allies were considering using fighter jets to impose a no-fly zone over Libya, patrolling and shooting down Libyan aircraft ordered to attack protesters.
His warning came amid growing concerns about the crumbling regime's ability to commit last desperate acts of mass murder, as reports suggested that Gaddafi could use chemical weapons against his own people.
Britain and America are also thought to be considering arming rebel forces in Libya, The Telegraph reported as reports circulated that US and Nato were massing forces close to the embattled nation.
The Daily Mail and The Telegraph said Cameron did not rule out "the use of military assets", saying Britain "must not tolerate this regime using military forces against its own people".
The papers quoted British sources as saying that Libya still has stocks of mustard gas chemicals.
According to the Daily Mail, Cameron threatened Gaddafi with military action last night, promising a no-fly zone and arms shipments to his enemies.
While Gaddafi has lost control of much of his country, he still remains in charge of Tripoli, the capital and home to a third of Libya's people.
Gaddafi yesterday showed no sign of wanting to quit, giving a deranged interview to the world’s media.
"They love me, all my people love me," he said."They would die to protect me."
Cameron announced that the vast majority of Britons had been evacuated from Libya and that the evacuation of foreign nationals would be largely completed by today.
The end of the evacuation effort has coincided with a meeting of senior Western politicians to begin the "next phase" of action against the Gaddafi regime.
On Sunday, Britain announced emergency plans to freeze the Gaddafi regime's assets in London.
The European Union will impose wide-ranging sanctions against Gaddafi and the Libyan government this week.
Cameron said, "If Gaddafi uses military force against his own people, the world cannot stand by. That is why we should be looking at a no-fly zone."
No-fly zones have previously been imposed over Iraq and Bosnia to prevent rogue regimes using air power against civilians.
Gen Sir David Richards, the chief of the defence staff, has been asked to draw up options for British military operations in Libya.
Cameron also said Gaddafi's departure was Britain's "highest priority", adding: "If helping the opposition would somehow bring that about, it is certainly something we should be considering."
Any British involvement in a no-fly operation could see Tornados and Typhoons flying from RAF Akrotiri in Cyprus.
The Libyan air force is equipped with French-built Mirage fighter-bombers, but British planners are more concerned about the regime's military helicopters, which include Soviet-made Mil Mi-24 gunships.
The Pentagon announced that the Americans had begun "repositioning forces" around Libya to provide "flexibility". It is believed to be considering moving a US aircraft carrier, the USS Enterprise, from the Red Sea into the Mediterranean to take up a position off Libya. The USS Kearsage, an amphibious assault ship, could also be redeployed.
The French also announced that they would back a possible military intervention with Nato partners.
The warnings were sounded after Gaddafi was accused of ordering Libyan aircraft to attack a radio station being used by rebels in the city of Benghazi.
Despite a promise in 2003 to give up weapons of mass destruction, Gaddafi is thought to have retained as much as 14 tons of the chemicals required to create mustard gas.
The stocks are said to be stored in secret secure facilities in the Libyan desert.
The disclosure came after a Gaddafi spokesman was said to have warned that there would be hundreds of thousands of deaths if the country descended into full-blown civil war.
Saif Gaddafi, the dictator's son and heir apparent, was yesterday pictured brandishing an assault rifle, rallying supporters and pledging to "send weapons" to loyalists.
Militias controlled by another of Gaddafi's sons were also massing on the outskirts of a rebel-held city.
If the no-fly zone is agreed, experts believe that Western governments may launch bombing raids on Gaddafi forces if he continues to attack protesters.
Libyan opponents of Gaddafi are calling for Nato air strikes, amid growing fears that they are too weak to overwhelm his still-powerful military on their own or defend liberated cities from attack.
Mustapha Gheriani, a spokesperson for an organising committee of lawyers, judges and professionals in Benghazi, the leading city of the revolution, said, "We can't protect ourselves at the moment from tanks and aircraft, let alone organise a march on Tripoli to topple Gaddafi.
"If there are just a few air strikes, his loyalists will leave him and his time will be numbered in hours. Otherwise he could survive for a long time and there could be terrible bloodshed."
Reports from Libya say helicopter gunships have been deployed against opposition, killing dozens of civilians.
Sources said Gen Richards' military options paper will also look at British ground operations.
Those were likely to be contingency plans to deal with the extraction of RAF pilots in the event of planes crashing or being shot down. Another option would be giving weapons and other support to groups inside Libya.
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