Libya's warring factions began crunch talks Monday as world leaders called for "bold political decisions" to prevent the oil-rich nation crumbling into a failed state.

Amid warnings that chaos in Libya has allowed the Islamic State group to make inroads on Europe's doorstep, United Nations envoy Bernardino Leon is pushing for an agreement before the start of the Muslim holy month of Ramadan on June 17.

"The timing for fighting has passed, the moment for bold political decisions has come," G7 leaders said in a closing statement 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."

Libya plunged into chaos after a 2011 NATO-backed uprising toppled and killed veteran dictator Moamer Kadhafi, with heavily armed former rebels carving out fiefdoms across the country.

Jihadist groups have exploited the lawlessness, which has also prompted a huge influx of migrants trying to make the dangerous crossing to Europe, with shipwrecks leaving hundreds dead and the European Union straining to respond.

Three previous rounds of peace negotiations between Libya's rival parliaments and governments have failed to reach an accord.

The talks in the Moroccan seaside resort town of Skhirat "will discuss a new draft" of a political agreement to end the conflict, the UN mission to Libya said on Friday.

"UNSMIL is of the firm conviction that this round will be decisive," the mission said.

Saying Libya was at a "critical juncture", the mission called on the country's rivals "to shoulder their historic responsibilities" by reaching a peace deal.

Talks got underway in Skhirat just before 2000 GMT, after a short delay, an AFP correspondent said.

Pressure has been mounting for a deal, with Algeria, Egypt and Italy on Sunday calling for a political agreement.

At a meeting of top diplomats hosted by Cairo, the three countries backed Leon's efforts, with Italian Foreign Minister Paolo Gentiloni saying Libya was "at a very important juncture".

- Warnings on jihadists -

He called for the rivals to "quickly find a solution that satisfies everyone," adding that an agreement was crucial not only for peace on the ground but to "control people smuggling and illegal migration" from Libya to Europe.

At negotiations last week in Algiers, Leon warned that Libya was "at the limit". With oil production stalled, institutions are running out of money to pay salaries and cover expenses, he said.

Leon urged the feuding factions to overcome their differences.

"The competing governments (are) not advancing, not flagging very clearly a decision to reach an agreement, while we have seen terrorism, we have seen Daesh (IS) becoming more and more important in the country," he said.

During April talks in Morocco, Leon and other negotiators said the sides were very close to an agreement on a draft proposal to form a national unity government that would serve for a maximum of two years.

After last week's two days of talks in Algeria, Libyan political factions called for the urgent formation a government so it can "swiftly assume its responsibilities to tackle the many difficult challenges facing Libya."

The G7 said it would "provide significant support" to help a new government rebuild infrastructure, including restoring public services and strengthening the economy.

Last week, Libyan factions expressed concern about the "upsurge in terrorist acts" and the "imminent danger" from the takeover by IS of some territory.

The jihadist group, which controls swathes of Syria and Iraq, has won the loyalty of several Islamist groups in Libya and claimed responsibility for a series of attacks and atrocities, including the killings of dozens of Egyptian and Ethiopian Christians.