* British embassy to pull out staff in few days
* Renewed Tripoli clashes hit fuel depot again
* Parliament to start voting on Monday in Tobruk
By Ayman Al-Warfalli
TOBRUK, Libya, Aug 2 (Reuters) - Libya's newly elected House of Representatives held its first session on Saturday, holed up in a heavily guarded provincial hotel as armed factions turned the two biggest cities, Tripoli and Benghazi, into battlefields.
Western governments, who have mostly evacuated their diplomats after two weeks of fighting, hope the new parliament can create space for negotiations after the worst clashes since the 2011 war that ousted Muammar Gaddafi.
But there was no sign of a let up in the capital Tripoli where a huge cloud of black smoke spread over the south of the city once again on Saturday after a fuel depot near the international airport was hit for the second time in a week as rival Zintan and Misrata brigades battled for control.
Fighting with rockets, anti-aircraft cannon and other heavy artillery in Tripoli and the eastern city of Benghazi has killed more than 200 people, and edged Libya closer to full-scale civil war just three years after the NATO-backed revolution.
Britain became the latest Western government to announce it would close its embassy, fearing being caught in the crossfire.
With its national army still in formation, Libya has struggled to control heavily armed factions that have entrenched themselves as de facto power brokers in the messy transition since Gaddafi's one-man rule.
Elected in June, lawmakers met on Saturday for an emergency session in Tobruk, a coastal city east of Benghazi, where they are supposed to form a new government that many Libyans hope will be a step to ending the crisis.
"Our homeland is burning," Abu Bakar Baira, interim head of parliament said. "We have to work fast, to meet the demands of the people and save them from this disaster."
The 200-member parliament will hold its first official session to elect its new president on Monday, Baira said. Some deputies aim to form a new cabinet to handle the crisis, three of them told Reuters.
Three years after Gaddafi's demise, few Libyan state institutions have popular legitimacy and the country still has no new constitution. Militias stormed the last parliament repeatedly to threaten lawmakers.
Heavily armed interior ministry troops and the Libyan army protected the Tobruk hotel that was chosen to host the parliament meeting after Tripoli and Benghazi were deemed too risky.
Western countries are worried Libya's escalating conflict could create a failed state just across the Mediterranean from mainland Europe. Fearing the violence could spill beyond Libya's borders, neighbours Egypt, Tunisia and Algeria all warn of the danger a failed Libya would pose.
Hundreds of Egyptians clashed on Friday with Tunisian border guards when they tried to force their way out of Libya, fleeing the fighting in Tripoli. Tunisia temporarily closed its frontier with Libya.
TWO CITIES IN CLASHES
Brigades of former anti-Gaddafi fighters from the western town of Zintan, and others from the town of Misrata and their allies have been fighting for nearly three weeks over the control of Tripoli's international airport.
The battle is part of a wider struggle involving Islamists, tribal leaders, federalists, nationalists and armed groups vying for the spoils of post-Gaddafi Libya and to shape the future of the OPEC producing country.
On Saturday, sporadic shelling resumed in the capital after two days of relative calm. Plumes of black smoke rose over the south of Tripoli from a burning fuel tank at the airport's fuel depot.
"A rocket fell and hit a new tank full of gasoline at the start of Saturday afternoon," National Oil Corporation (NOC) spokesman Mohamed al-Harari said. "Firefighters have pulled out again because of the fighting."
Firefighters battled for days, sometimes under fire, to control a huge blaze ignited a week ago when the same fuel depot was hit by a rocket.
Britain said late Friday it would close its embassy from Aug. 4, evacuating staff to Tunisia.
Britain was one of the last western countries with an embassy open in Tripoli after the United States, the United Nations and most European states pulled their diplomatic staff.
"Reluctantly we've decided we have to leave and temporarily suspend embassy operations in Libya," British Ambassador Michael Aron said on Twitter. "The risk of getting caught in the crossfire is too great."
Benghazi was calmer on Saturday, four days after an alliance of Islamist militants from the Ansar al-Sharia group and ex-rebels drove the armed forces out of a special forces base and overran a major police station.
Ansar al-Sharia is designated a terrorist group by Washington which blames it for an attack on the U.S. mission there that killed the U.S. ambassador in 2012.
The Islamist alliance, called the Benghazi Revolutionaries Shura Council, has kept off the streets over the last three days although it remains the main military force inside the city, Reuters reporters there said. (Additional reporting by Feras Bosalum, writing by Aziz El Yaakoubi; Editing by Patrick Markey and Robin Pomeroy)