Most recent reports from Libya describe a dire situation, which suggests a civil war is looming. Rebel troops and Gaddafi supporters are constantly fighting for key towns close to the capital Tripoli.
The uprising was most successful in the eastern parts of the country, far away from the capital, which can be explained by the tribal nature of Libya. Similar to Iraq under Saddam Hussein, in times of peace the central government has sufficient control over the various tribes. Once the regime was destabilized in 2003 there was no control left, just as it is now in Libya.
The rebel forces are also supported by some military officials, who joined the fight against the regime, which was a huge blow to Gaddafi.

Furthermore various news agencies release reports of possible human rights violations and massacres by the regime, which sparked the debate about a no-fly zone.
Recent reports suggest, that NATO forces are preparing for some sort of military engagement in Libya. It is not certain what the actual plans are, but everything from the establishment of a no-fly zone to an attack on Gaddafi’s army.
Either one could be regarded as an act of war and do we really want to be engaged in yet another Arab country?
There seem to be some 1600 US soldiers on the Greek island Crete, which is severely close to the Libyan coast. They are accompanied by the two warships “USS Kearsarge” and “USS Ponce”, which are both not suitable to enforce a no-fly zone.
It is unclear how many troops from other NATO countries are already on Crete.

No matter what will happen, interfering will likely spark severe retaliation by Gaddafi. Keep in mind, that this is the man, who did not hesitate to bomb his own people.

Update: Below is a very informative video about how an actual no-fly zone works and what is necessary to enforce it.