Rebels retreated from the key Aleppo district of Salaheddin under a deadly rain of shellfire Thursday, as a veteran Algerian diplomat was set to be named the new international envoy to Syria.

"We have staged a tactical withdrawal from Salaheddin. The district is completely empty of rebel fighters. Regime forces are now advancing into Salaheddin," said Hossam Abu Mohammed, a Free Syrian Army (FSA) commander, with the battle for Syria's commercial capital raging into a second day.

"The fighters are withdrawing to (nearby) Sukari district, where they are preparing a counter-attack," he said by telephone.

Abu Mohammed cited heavy shelling and the army's use of thermobaric bombs, which throw out a wall of fire to incinerate targets in enclosed spaces.

"A large number of civilians were killed, as were some 40 rebels," he said. "Forty buildings have been flattened."

State television said: "Our special forces have cleansed Salaheddin district of terrorists."

But Rami Abdel Rahman, head of the Syrian Observatory for Human Rights, said that fighters remained in the district, ready to "fight to the death."

Wassel Ayub, who commands the Nur al-Haq Brigade, said the FSA had withdrawn "to open a new front in Saif al-Dawla and Mashhad."

FSA spokesman Kassem Saadeddine, speaking by Skype, said the withdrawal "does not mean we are leaving Aleppo. We have military plans to fight in the city, but we cannot reveal them."

In Damascus, a security source said regime forces were "advancing quickly" in Salaheddin towards Saif al-Dawla.

"But the next big battle, which will be very fierce, will be in the (southeastern) Sukari district," he added.

At least 17 people were killed in Aleppo, scene of fierce battles since July 20, the Observatory said, adding that two children and a citizen journalist were among them.

Nationwide, the toll reached 96 -- 37 civilians, 31 soldiers and 28 rebels -- according to the Observatory. That compared with 167 on Wednesday, including 33 in Aleppo.

Elsewhere, fierce fighting also broke out in Damascus province, where at least 15 people were killed, most of them civilians, while regime forces shelled Zabadani, the monitoring group said.

On Wednesday, loyalist troops launched their offensive against the rebels, who had claimed to control half the city, after President Bashar al-Assad vowed a day earlier to crush the rebellion that erupted in March 2011.

Diplomats at the United Nations said former Algerian foreign minister Lakhdar Brahimi was expected to be named as the new UN-Arab League envoy to Syria.

Negotiations were still going on over the envoy's role and how the United Nations will operate in Syria amid the intensifying civil war. The mandate of the UN mission in the country ends on August 20.

An official announcement of the 78-year-old's appointment was expected to be made early next week, diplomats said, speaking on condition of anonymity.

Brahimi was the UN envoy in Afghanistan after the September 11, 2001 attacks and in Iraq after the 2003 US-led invasion.

Kofi Annan, a former UN secretary-general, said he was leaving the post because of the lack of international support for his efforts to end the 17-month Syria conflict, in which rebels say more than 20,000 people have been killed.

He is staying on until August 31.

Activists on the Syria Revolution 2011 Facebook page called for the traditional demonstration following weekly Muslim prayers on Friday, with this week's slogan being "Arm us with anti-aircraft weapons."

On the political front, Assad appointed Health Minister Wael al-Halqi as his new premier following the defection this week of Riad Hijab, a leading Sunni Muslim in the minority Alawite-dominated regime.

Halqi served as ruling Baath party secretary from 2000 to 2004 in his home province of Daraa, the birthplace in southern Syria of the anti-Assad revolt.

Day two of the battle for Aleppo came as Syria's key regional ally Iran hosted a 29-nation meeting aimed at finding ways to end the raging conflict.

State media said the foreign ministers of Iraq, Pakistan and Zimbabwe were present. Lower-ranking diplomats, most of them ambassadors, represented the other nations.

Foreign Minister Ali Akbar Salehi opened the meeting by calling for "national dialogue between the (Syrian) opposition, which has popular support, and the Syrian government to establish calm and security," according to state television.

He added that Iran was prepared to host any such dialogue.

Earlier, Salehi said Tehran was attempting to revive parts of Annan's plan, notably: implementing a ceasefire, sending humanitarian aid and laying groundwork for national dialogue.

Excluded from the Tehran meeting were Western and Gulf Arab nations that Iran has accused of giving military backing to the insurgency.

There was no immediate word from the predominantly Sunni Muslim Syrian opposition and rebels on how they viewed the conference in majority Shiite Iran, a stalwart ally of Assad's regime.

The United States dismissed the conference in Tehran, saying the Islamic Republic had been helping Assad kill his people.