* NATO Secretary General says air campaign will go on
* Gaddafi says will avenge civilian deaths
* Oil consuming nations release reserves
* Rebels hail latest NATO attack major success (Adds details on latest NATO bombing, defector, edits)
By Nick Carey
TRIPOLI, June 23 (Reuters) - NATO's chief on Thursday dismissed a call from Italy for a suspension of hostilities in Libya and tried to reassure wavering members of the Western coalition that Libyan leader Muammar Gaddafi can be beaten.
Italy's ceasefire call exposed the strain on the NATO alliance, nearly 14 weeks into a bombing campaign that has so far failed to dislodge Gaddafi but is causing mounting concerns about its financial cost and about civilian casualties.
Highlighting the wider consequences of the war in the North African oil-producer, big consuming nations announced a move to release reserves from oil stockpiles to fill the gap left by disruption to Libyan output.
Rebels hailed the latest NATO strike on pro-Gaddafi positions as a boost to their cause, saying over 200 of his men had been killed in bombing that took out weapons being used to pound the rebel-held coastal town of Misrata.
Asked about Italy's ceasefire call, NATO Secretary-General Anders Fogh Rasmussen said in a newspaper interview: "No, on the contrary. We shall continue and see it through to the end."
"We will take the time needed until the military objective is reached: end all attacks against Libyan civilians, return armed forces to barracks and freedom of movement for humanitarian aid," he told France's Le Figaro newspaper.
NATO says it is operating under a United Nations mandate to protect civilians from Gaddafi's forces as he tries to crush an uprising against his 41-year rule. Gaddafi says NATO's real aim is to steal the country's plentiful oil.
The defence bloc said it delivered a blow to Gaddafi forces near Zlitan, a town about 170 km (105 miles) east of Tripoli, with an air and naval strike on Wednesday that took out 13 armed vehicles, an armoured personnel carrier and a rocket launcher.
"NATO aircraft dropped leaflets warning them to leave the compound. Of course they ignored the warning and over 200 Gaddafi people were killed there," a rebel spokesman who identified himself as Mohammed said.
"If NATO continues this way, things will be excellent," he said.
The assault killed a further nine Gaddafi fighters at a checkpoint northwest of Zlitan, he said.
At the weekend, NATO acknowledged for the first time in the campaign that it may have caused multiple civilian casualties, when an air strike hit a house in Tripoli, prompting a riposte attack from Gaddafi in an audio speech broadcast late Wednesday.
"You said, 'We hit our targets with precision', you murderers!" he said. "One day we will respond to you likewise and your homes will be legitimate targets."
Gaddafi has said he will fight until the end but a former foreign minister who has defected said he believed he was negotiating asylum either elsewhere in Africa or Belarus.
"I think that he will leave Libya in a few weeks," Abdurrahaman Shalgam told Italy's Corriere della Sera TV.
Libyan officials in Tripoli took reporters to the central Green Square where a crowd of around 200 people, most of them women waving green flags or pictures of Gaddafi, had gathered to demonstrate their support.
"We love our leader. We want him to stay in this country," said one woman, who gave her name as Budur.
There was though a note of discord. As the reporters were guided back to their bus by government minders, a man shouted out of his car window: "Gaddafi go down!"
Time is now a crucial factor for both sides in the conflict, with unity in the NATO-led coalition likely to come under more strain and Gaddafi's ability to resist being steadily worn down by sanctions, air strikes and fighting with rebels.
In Paris, the 28-member International Energy Agency said it would release 60 million barrels a day over an initial 30 days to fill the gap left by the disruption to Libya's output.
Libya was exporting about 1.2 million bpd before the rebellion that brought its oil industry to a standstill.
"This supply disruption has been underway for some time and its effect has become more pronounced as it has continued," the IEA said. "Greater tightness in the oil market threatens to undermine the fragile global economic recovery." (Additional reporting by John Irish and Muriel Boselli in Paris, Hamid Ould Ahmed in Algiers, Stephanie Nebehay in Geneva, David Brunnstrom in Brussels, Philip Pullella in Rome, Anis Mili in Al Qalaa and Jason Hovet in Prague; writing by Christian Lowe and Mark John; editing by Angus MacSwan)