Libyan officials said 15 civilians - including three children - were killed in Monday's attack on Sorman.
The estate belongs to Khweildy al-Hamidy, a member of Libyan leader Col Muammar Gaddafi's inner circle. He was not hurt in the raid, officials said.
A BBC correspondent at the scene said the main building had been pulverised.
Nato confirmed it carried out operations in the area of Sorman.
In a statement, Nato said: "This was a precision strike on a legitimate military target - a command-and-control node which was directly involved in co-ordinating systematic attacks on the Libyan people."
It said it did not target specific individuals.
Libyan government spokesman Moussa Ibrahim condemned the raid.
"This is very twisted logic, so you kill children, you kill mothers, you kill fathers, aunts and uncles and then you try to explain it by twisted political military logic," he said.
On Sunday, Nato said one of its missiles struck a residential area in Tripoli. It admitted a "weapons failure" may have led to civilian casualties.
Frozen assetsBBC Middle East editor Jeremy Bowen was taken to see the remains of the compound and was told by Libyan officials that it had been hit by eight rockets in the early hours of Monday.
Mr Hamidy has been one of Col Gaddafi's close allies since the 1969 coup that brought the Libyan leader to power.
Our correspondent was then taken to a hospital where all the beds in one ward had been filled by the dead left by the raid.
The bodies were in such bad condition that it was impossible to establish how many people had been killed, but our correspondent says a doctor told him there were 11 adults and four children.
Among the dead were apparently Mr Hamidy's two small grandchildren and his pregnant daughter-in-law.
EU foreign ministers meeting in Luxembourg have agreed to tighten sanctions on Col Gaddafi's government. The assets of six port authorities will be frozen, the EU said in a statement. Humanitarian shipments will be exempt.
"The EU acknowledges the urgent financial needs of the TNC [Transitional National Council] in order to serve the Libyan people," the statement said.
And the EU said that the "mobilisation of international resources, including, where possible, through the use of Libyan frozen funds... is key to support an inclusive transition process."
But speaking on the margins of the meeting, Italian Foreign Minister Franco Frattini warned that Nato was endangering its military credibility by mistakes in targeting which led to civilian deaths.
"You can't run the risk of killing civilians, this is something that is absolutely unacceptable," Mr Frattini said.
Meanwhile, the United Arab Emirates (UAE) has frozen the assets of 19 Libyan individuals and institutions in compliance with UN sanctions adopted on 27 February.
Late on Monday, Libyan rebels said 22 security personnel had defected from Col Gaddafi's forces in the south of the country.
Four of the defectors told journalists in the eastern city of Benghazi they had been under orders not to give captured rebels the rights of normal prisoners.
"Our direct officers gave us orders such as, catch 'those rats'," said Major Lamin Sidi Ibrahim al-Tabouwi, Reuters news agency reported. "We were ordered to show no mercy, not to respect their [rebels'] rights."
Their accounts could not be independently verified.
Nato's mission - to enforce a no-fly zone over Libya to protect civilians using "all necessary measures" short of a ground invasion - began in March in response to Col Muammar Gaddafi's violent response to a popular uprising.
The intervention was mandated by the UN, and led by France, Britain and the US until the end of March, when Nato took over.
Having initially been given 90 days - which would have run out on 27 June - the mission has been extended for a further 90 days.
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