His comments came as the world's top diplomats pledged support to Iraq at a conference in Paris following the beheading of a third hostage, and as US Secretary of State John Kerry stepped up efforts to forge a broad anti-jihadist coalition.
"ISIS is a group of terrorists with whom there is no chance whatsoever to negotiate," Rasmussen said in Brussels when asked why the West was acting only now and not months earlier when the group first took over swathes of Iraq.
"We are on the frontline of a new battle - a new battle between tolerance and fanaticism, between democracy and totalitarianism, between open and closed societies."
Rasmussen said that IS was the biggest threat the military alliance faces apart from tensions with Russia -- but that while immediate action was necessary against the jihadists, Moscow's actions in Ukraine did not pose an "imminent threat" to NATO.
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He said Iraq had not invited NATO itself to take part in the fight against Islamic State but that the alliance was ready to offer support by helping build the capacity of the armed forces, coordinating allies and sharing intelligence.
Former Danish premier Rasmussen's speech came as he prepares to hand over the reins as NATO secretary general to Jens Stoltenberg, the ex-prime minister of Norway, at the end of September.
Rasmussen denied that Western powers were hard pressed to tackle both the security challenge from IS and a threat from a resurgent Russia, which the West accuses of sending troops in support of rebels in eastern Ukraine.
"We are able to handle the broad range of security challenges whether they are seen to the east or the south," Rasmussen said.
But he added: "I don't think Russia poses an imminent threat to NATO allies for the very reason that Russia knows that we have an Article Five that protects any ally against attack."
Article five of NATO's Washington treaty calls for the alliance to come to the collective defence of any one member if it comes under attack.
He said he was still hopeful of finding a political solution in Ukraine and that Russia would be "capable to negotiate if they decided to".