Nato warplanes killed around 14 rebels early on Saturday after a stream of anti-aircraft fire was shot in to the night sky.
The victims included medics and a patient in an ambulance, struck near the Libyan front line between rebel and pro-Gaddafi forces east of Brega.
The air strike was the first major friendly fire incident of the chaotic desert war since western aeroplanes joined the fight two weeks ago.
"I only feel sad about the people who died, I don't blame the pilots at all," said Tarek Al-Shagaaby, a law student turned rebel, aged 25. He said he was about one mile away from a huge fireball shortly after midnight and afterwards buried the bodies of the rebels in the desert.
"It was a big disaster for Nato but we don't want the air strikes stopped. Gaddafi has heavy artillery and without Nato he could easily overwhelm us. We buried those we found at the site, they were martyrs."
Mr Al-Shagaaby showed The Sunday Telegraph grisly mobile phone footage he had shot showing skeletal human remains inside vehicles which had been incinerated. Gaddafi's forces later pushed the rebels back a few miles in to the desert away from Brega.
Another rebel who witnessed the air strike, Nasr Shakmak, 33, a former soldier in the Libyan Army claimed that a Gaddafi infiltrator had fired anti-aircraft rounds at the warplanes to provoke an air strike.
But it was more likely that an overexcited rebel had fired in to the sky, making pilots think they were coming under attack.
Rebels had been warned of the dangers of so called celebratory fire, but in such an undisciplined army many do so anyway.
Later in the day there was scrappy fighting around the oil town of Brega which rebels must take if they are to push west.
They claim they have new military leaders, who arrived at the front on Friday, but there was little sign of greater discipline on Saturday.
A large group of rebels lounged by a roadside on a hilltop several miles from Brega, watching occasional shell bursts fired at Gaddafi's troops.
Sightseers were mingled among the rebels, even though the position was in range of rocket barrages, including boys as young as 10 and groups of men who had driven from Benghazi for a day trip to see the war.
Nasir Ammar, a worker in a cement factory said: "I have come to watch. I hope our boys will get in to Brega this afternoon."
The sound of the Koran being recited blared out from loudspeakers and overhead Nato jets appeared to still by flying. Rebels claimed that the Gaddafi forces, including large numbers of African mercenaries have switched tactics in the past week.
Instead of using tanks and rocket launchers based on lorries which are easily hit from the air the Gaddafi forces now use pickup trucks with mortars or rockets mounted on the back to launch hit-and-run attacks.
A rebel called Hisham Milod said: "This morning cars flying our flag of free Libya drove up to the road and fired rockets at us blowing up three cars.
"They left out the bodies of our dead for us but open fired when we came to collect them."
The rebels still have a tendency to panic and flee as soon as they come under fire, and the past week has shown that even with Natos air power supporting them they are unable to make much progress against Gaddafi's better armed forces."