ISTANBUL — The United States and other nations today formally recognized Libya’s main opposition group as the country’s legitimate government until a new interim authority is created.

The decision, which declared Libyan leader Moammar Gadhafi’s regime no longer legitimate, will potentially free up cash that the rebels fighting Libyan forces urgently need.

The front lines in the Libyan civil war have largely stagnated since the popular uprising seeking to oust Gadhafi broke out in February. Rebels, backed by NATO’s air force bombings, control much of the country’s east and pockets in the west. But Gadhafi controls the rest from his stronghold in Tripoli, the capital.

Today’s final statement by the so-called Contact Group on Libya said the “Gadhafi regime no longer has any legitimate authority in Libya,” and Gadhafi and certain members of his family must go.

The group said it would deal with Libya’s main opposition group — the National Transitional Council, or NTC — as “the legitimate governing authority in Libya” until an interim authority is in place. In addition to the U.S., the 32-nation Contact Group on Libya includes members of NATO, the European Union and the Arab League.

The recognition of the Libyan opposition as the legitimate government gives foes of Gadhafi a major financial and credibility boost. Diplomatic recognition of the council means that the U.S. will be able to fund the opposition with some of the more than $30 billion in Gahdafi-regime assets that are frozen in American banks.

“The United States views the Gadhafi regime as no longer having any legitimate authority in Libya,” said U.S. Secretary of State Hillary Rodham Clinton. “And so I am announcing today that, until an interim authority is in place, the United States will recognize the NTC as the legitimate governing authority for Libya, and we will deal with it on that basis.”

The Contact Group representatives broke into spontaneous applause when Clinton announced that the U.S. recognizes the NTC, according to U.S. officials.

Rebel spokesman Mahmoud Shammam welcomed the recognition of the National Transitional Council, calling on other nations to deliver on a promise to release hundreds of millions of dollars in funds to the Libyan opposition. “Funds, funds, funds,” Shammam said, in order to stress the opposition’s demand.

He said the opposition hopes to hold elections within a year and resume oil exports very soon, saying the damage to oil facilities has been minimal and repaired. However, Shammam ruled out any new oil contracts until a new elected government is in place.

Ahead of the meeting in Istanbul, a spokesman for the Libyan government said its members were ready to die in defense of the country’s oil against attacks by the rebels and NATO forces. “We will kill, we will die for oil,” Moussa Ibrahim said. “Rebels, NATO, we don’t care. We will defend our oil to the last drop of blood and we are going to use everything.”

A senior U.S. official, speaking on condition of anonymity to discuss private diplomatic conversations with the NTC and the other Contact Group members, said Friday’s decision by the Contact Group on Libya indicates strong support for the NTC and that Gadhafi’s time is up.

There had been concerns about whether the initial replacement government would represent the full spectrum of Libyan society. Human Right Watch urged the Contact Group on Libya to press the opposition to ensure that civilians are protected in areas where rebels have assumed control, citing abuses in four towns — Awaniya, Rayayinah, Zawiyat al-Bagul, and Qawalish — recently captured by rebels in the western mountains, including looting, arson and beatings of some civilians who remained when government forces withdrew.

The U.S. official, however, said the National Transitional Council won international recognition after it said it would abide by its commitments and find a way forward for a truly democratic Libyan government. The assurances included upholding the group’s international obligations, pursuing a democratic reform process that is both geographically and politically inclusive, and dispersing funds for the benefit of the Libyan people.

“We believe them, we think that’s what they intend to do,” Clinton said of the opposition’s assurances.

The U.S. is impressed by the progress the NTC has made in laying the groundwork for a successful transition to a unified, democratic Libya which protects the rights of all of its citizens, including women and minority groups, she said.

“We think they have made great strides and are on the right path,” Clinton said. “The assurances that the NTC offered today reinforced our confidence.”

In response to a question why it took so long to recognize the NTC, Clinton said the U.S. administration analyzed the situation and wanted to make sure that the NTC’s actions accord with its statements, aspirations as well as its values.

“We really have acted in warp time in diplomatic terms, but we took our time to make sure that we were doing so based on our best possible assessments,” Clinton said.

The Contact Group statement urged a smooth transition to democracy and ruled out participation of “perpetrators of atrocities against civilians” in a future political settlement.

“The process should lead to national reconciliation,” it said. “All groups should have their voices heard.”

The U.S. official said the recognition of NTC as the government of Libya would allow countries to help the opposition access additional funds. However, he stressed that more legal work needs to be done by some countries, including the U.S. and at the United Nations, to fully legalize that step.

The recognition does not mean that the U.S. diplomatic mission in the rebel-held city of Benghazi, Libya, is now an embassy. Titles of staff and names of offices will be decided in the coming days, the official said.

Meanwhile, Gadhafi urged his loyalists to take up arms to attack Libya’s enemies.

“Crashing waves of angry masses, rising to the challenge with high heads and loud voice saying we will never surrender. Smash NATO! We are courageous, we are mujahedeen!” said the Libyan leader in a televised address on Thursday.