The regional army has backed the move to part-autonomy, local leaders say Civic leaders in eastern Libya have declared semi-autonomy for their oil-rich region at a meeting in Benghazi.
They say the move is necessary as the region, once known as Cyrenaica, has been neglected for decades.
But the move has caused tension with the governing National Transitional Council (NTC) in the capital Tripoli.
NTC head Mustafa Abdel Jalil blamed other Arab countries for stirring trouble in Libya and inciting calls for its partition.
Without naming any nations by name, Mr Jalil said they sought to "avoid the contamination of the flood of the revolution which stretches from the west of the Arab homeland heading to the east".
Suleiman Fortia, another NTC member, told the BBC that the authors of the declaration were trying to hijack the revolution and did not fully represent the region.
However, the declaration has significant popular support among people in Benghazi, the BBC's Gabriel Gatehouse in Libya's second city reports.
The document has no force in law but is a declaration of intent by the local leaders, our correspondent adds.
Hundreds of people attended the Congress of the People of Cyrenaica, held in a hangar on the outskirts of Benghazi.
Analysis
Hundreds of people crowded into a hangar on the outskirts of Benghazi.
There were tribal elders in traditional costume, military officers in a multitude of uniforms, and militia leaders in the patchy camouflage fatigues of the revolution.
They danced and clapped their hands as they chanted slogans about federalism. "We are now the state of Cyrenaica," said a spokesman for the event, adding that the military was behind them.
The atmosphere was heady with a sense of new political beginnings. But the declaration has no force in law. Libya is a country in a state of political flux. Tribes and other groups across the country are staking out their positions, and today's event was very much part of that process.
But the concept of autonomy does have significant popular support in the east, where many people feel they have suffered decades of neglect and discrimination.
The conference announced that it wanted to have its own parliament, police force, courts and capital - in Benghazi. Foreign policy would be left to the federal government in Tripoli, it said.
Ahmed al-Zubair, Libya's longest-serving political prisoner under Col Muammar Gaddafi and a member of the NTC, was appointed leader of a governing council.
He promised to "protect the rights" of people in the region, but told the gathering: "Libya will not be divided. It is one nation."
Another senior tribal figure also downplayed talk of dividing Libya.
"Federalism is not division but unity," Fadl-Allah Haroun, commander of a revolutionary militia, told the AP.
"We are not talking about changing the flag or national anthem. We are talking about different administration, a parliament and managing the financial affairs."
Historically, Cyrenaica is one of three regions Libya was divided into. The other two were Tripolitania in the north-west and Fezzan in the south-west.
Cyrenaica's leaders say the region stretches from the central coastal city of Sirte to the Libyan-Egyptian border in the east - containing two-thirds of the country's oil reserves.
The three states enjoyed federal power following Libya's independence in 1951, until the country became a unitary state in 1963.
The people of Cyrenaica, known as Barqa in Arabic, long felt marginalised and neglected under Gaddafi, who focused much of the development on the west.
The city of Benghazi was the seat of the uprising that eventually toppled the former dictator.
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