Islamist forces on Monday seized control of a town in a fresh attack in Mali's government-held south and vowed to strike "at the heart" of France as it waged a fourth day of airstrikes against them.
A local government official reported the jihadists had seized Diabaly, some 400 kilometres (250 miles) north of the capital Bamako.
Meanwhile French warplanes launched airstrikes on the town of Douentza, 800 kilometres north of Bamako, residents reported.
"Planes repeatedly bombed the Islamists' headquarters in Douentza. It was destroyed but the Islamists were not there," said a resident on condition of anonymity. Other locals confirmed the report saying the extremists had already fled.
France launched the operation alongside the Malian army on Friday as the insurgents threatened to advance on Bamako after months of torpor over a planned African military intervention to drive out the jihadists.
Experts had said a regional operation could only get off the ground in September.
French Defence Minister Jean-Yves Le Drian confirmed the Islamist victory in Diabaly, which put them on the road leading directly to the capital.
"We knew there would be a counter-offensive towards the west," he told BFM Television. "They have taken Diabaly, which is a small town, after heavy fighting and resistance from the Malian army, which was insufficiently equipped at that exact point."
He earlier told journalists that while the Islamists had "retreated" in the east of Mali, French forces were facing a "difficult" situation in the west where rebels are well armed.
The attack was led by Abou Zeid, a leader of Al-Qaeda in the Islamic Maghreb (AQIM), said a regional security source on condition of anonymity.
On Sunday, French Rafale fighter planes struck bases used by Al-Qaeda-linked fighters in Gao and Kidal, two of the main towns in northern Mali.
Sixty Islamists were killed in Gao alone on Sunday, according to residents and a regional security source. A French helicopter pilot was also killed in fighting, according to the French defence ministry.
French warplanes also attacked rebel stockpiles of munitions and fuel near Kidal, a stronghold of rebel group Ansar Dine (Defenders of Faith).
And they hit the town of Nampala some 50 kilometres north of Diabaly, as well as a base in Lere, near the border with Mauritania.
A leader of one of the Islamist groups occupying Mali's vast north vowed revenge against France, which stepped up security on home soil.
"France has attacked Islam. We will strike at the heart of France," said a leader of the Movement for Oneness and Jihad in West Africa (MUJAO), an offshoot of AQIM, threatening the country's interests in Bamako, the rest of Africa, and Europe.
Another MUJAO leader Omar Ould Hamaha, nicknamed "Redbeard", warned on radio Europe 1 that France had "opened the doors of hell" with its intervention and faced a situation "worse than Iraq, Afghanistan or Somalia".
In Bamako the French high school was closed on Monday as a "precautionary measure", French Ambassador Christian Royer said.
MUJAO's Abou Dardar also referred to France's seven hostages held in Mali. "We will make a statement on the hostages today. From today all the mujahedeen are together."
At the request of Paris, the UN Security Council was to meet later Monday to discuss the conflict, a spokesman for France's UN mission said.
Aides to Hollande described the militants as better trained and armed than expected.
Meanwhile a West African intervention force for Mali, authorised by the Security Council was taking shape.
French President Francois Hollande met with Nigerian leader Goodluck Jonathan on Monday, whose country will lead the intervention and provide around 600 men.
He will also meet with his Burkinabe counterpart Blaise Compaore whose country is providing 500 troops. Niger, Senegal and Togo have also pledged 500 troops each. Benin and Ghana have also promised to send troops.
Media reports have said France is deploying about 500 troops in Mali.
A planned 400-strong European Union military training mission is expected to be speeded up and launched by early February, but would not have a combat role, said Michael Mann, spokesman for EU foreign policy chief Catherine Ashton.
France's intervention has been backed by the European Union, NATO and the United States, while Britain is providing logistical support in the form of transport planes.
Germany said Monday it was considering ways to help France in its mission in Mali such as providing logistical, medical or humanitarian aid.
The Islamists took advantage of a power vacuum created by a March military coup to seize control of huge swathes of northern Mali where they imposed a brutal form of Islamic law.