WRAPUP 3-Rebels killed, Gaddafi camp says NATO can't stop war
* Seven rebels killed in Zlitan attack - hospital
* Gaddafi son pledges to fight on, irrespective of NATO
* NATO drops leaflets, bombs at start of Ramadan
(Adds call on rebels to defect, tribe's anger, front line)
By Mussab Al-Khairalla
MISRATA, Libya, Aug 2 (Reuters) - Muammar Gaddafi's forces counter-attacked rebels in a strategic town on Tuesday, killing seven insurgents, as the Libyan leader vowed to crush a Western-backed uprising.
A son of Gaddafi said the conflict would go on until the rebellion was wiped out, whether or not NATO stopped its bombing campaign, leaving little room for diplomacy to end a war that has killed thousands and divided Libya.
The rebels and their foreign backers kept up the pressure on the veteran leader as the Muslim holy month of Ramadan began, with NATO planes bombing military targets and dropping leaflets over the capital calling on loyalists to give up.
In return, the government urged former allies turned rebels in the east to switch sides again, offering them an amnesty, promotions and other benefits, the state news agency said.
The front lines are in the Western Mountains near Tunisia, around the eastern oil hub of Brega and close to Zlitan, 160 km (100 miles) east of Tripoli and near rebel-held Misrata, Libya's third-largest city.
The rebels, who have seized about half Libya but lose ground to attacks by better armed and trained Gaddafi forces, had been seeking to consolidate recent gains around Zlitan.
But hospital sources in Misrata said a counter-attack by Gaddafi forces on Tuesday killed seven rebels and wounded 65 fighters. A Reuters reporter between the two towns saw plumes of smoke and heard intermittent gunfire coming from Zlitan.
Gaddafi's son Saif al-Islam seemed to remove a government offer of ceasefire talks if NATO stopped bombing.
"Regardless of whether NATO leaves or not, the fighting will continue until all of Libya is liberated," he said in comments made on Sunday and broadcast on Monday.
A U.N envoy was dispatched to Libya last week but made little visible progress and said the two sides were far apart.
Gaddafi's call for eastern rebels to return to the fold may also be a sign he senses an opportunity to exploit divisions caused by the slaying last week of the rebel military commander in as yet unexplained circumstances.
General Abdel Fattah Younes family said on Tuesday their powerful tribe might take justice into its own hands if the rebel leadership failed to come clean over who had killed him.
The killing, after Younes was summoned back from the front by his superiors, has prompted speculation of conspiracies and raised fears among Western governments about the rebels' reliablity.
"The rebels that the West has been counting on to replace the Gaddafi regime apparently cannot even control their base territory in eastern Libya, let alone govern the entire country," Stratfor, a global intelligence company, said.
The Muslim holy month began in Libya on Monday, with many saying it might lead to a lull in fighting. But rebels in Zlitan were optimistic after their first day of fasting.
"Fasting has only increased our determination and resolve to defeat the brigades of the tyrant (Gaddafi)," said frontline commander Husam Hussein.
At a rebel base nearby, off-duty fighters prepared meals of pizzas and pastries as milk and juice were cooled in crushed ice before being sent to the front.
His unit made gains on the eastern outskirts of Zlitan but later said they had to fight off another counter-attack and were more or less back where they had started.
NATO said it had hit about a dozen targets, including ammunition dumps and missile systems on Monday.
A NATO spokesman said the front line was shifting but rebels had disrupted main supply routes for Gaddafi's forces.
"LONG LIVE GADDAFI"
Despite slow rebel progress and mounting bills for bombing raids, Britain and France, leading members of NATO, said they will continue for as long as needed.
About 30 nations have recognised the Benghazi-based rebel government, the Transitional National Council (TNC). But others are concerned that NATO has overstepped its U.N. mandate to protect civilians.
Venezuela's President Hugo Chavez gave some rare outside support to Gaddafi, who is wanted by the International Criminal Court on charges of crimes against humanity for attacks on civilians.
"Long live Muammar Gaddafi," he said in a televised address. (Additional reporting by Missy Ryan in Tripoli, Rania El Gamal in Benghazi, Michael Georgy in Western Mountains, Joseph Nasr in Berlin; Writing by David Lewis and Richard Meares, editing by Angus MacSwan)
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