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.

Once a new unity government is in place, the G7 said it would "provide significant support" to help it rebuild the infrastructure in Libya, including restoring public services and strengthening the economy, and to help eradicate terrorist and criminal networks.

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.

The turmoil has allowed jihadists from the Daesh group to make inroads in the country, sparking fears that it could become a jihadist stronghold on Europe's doorstep.