The Libyan leader, sought by the International Criminal Court for a brutal crackdown on anti-government protesters, delivered the warning in a telephone message played yesterday to thousands of supporters gathered in the main square of the capital Tripoli.
It was one of the largest pro-government rallies in recent months, signaling that Gadhafi can still muster significant support.
A green cloth, several hundred meters long and held aloft by supporters, snaked above the crowd filling Tripoli's Green Square. Green is Libya's national color.
A series of powerful explosions later rattled the heart of the capital, apparently new NATO airstrikes, as Gadhafi supporters cheered, honked horns and fired into the air in the street. Black smoke could be seen rising from the area near Gadhafi's Bab al-Aziziya compound.
Gadhafi spoke from an unknown location in a likely sign of concern over his safety. Addressing the West, he warned that Libyans might take revenge for NATO bombings.
"These people (the Libyans) are able to one day take this battle ... to Europe, to target your homes, offices, families, which would become legitimate military targets, like you have targeted our homes," he said.
"We can decide to treat you in a similar way," he said of the Europeans. "If we decide to, we are able to move to Europe like locusts, like bees. We advise you to retreat before you are dealt a disaster."
It was not immediately clear whether Gadhafi could make good on such threats.
In the past, Gadhafi supported various militant groups, including the IRA and several Palestinian factions, while Libyan agents were blamed for attacks in Europe, including a Berlin disco bombing in 1986 and the downing of Pan Am Flight 103 over Lockerbie, Scotland, that killed 270 people, mostly Americans. Libya later acknowledged responsibility for Lockerbie.
In recent years, however, Gadhafi was believed to have severed his ties with extremist groups when he moved to reconcile with Europe and the United States.
Al-Qaida and other jihadi groups have opposed Gadhafi since he cracked down in the late 1990s on the Islamist Libyan Islamic Fighting Group which sought to replace his regime with an Islamic state.