G7 leaders urged Libya's warring factions to take "bold political decisions" at UN peace talks Monday, as fears grew that the oil producer is on the verge of collapsing into a failed state.

"The timing for fighting has passed, the moment for bold political decisions has come," the leaders of the world's most industrialised nations said in a closing communique after a summit in Germany.

"Libyan leaders must now grasp the opportunity to conclude these negotiations and form a Government of National Accord accountable to the Libyan people," the G7 added as the rival sides met for a new round of peace talks in Morocco on Monday.