As sagetreib points out, a vital illusion is something of an oxymoron, as is the "love" Gatsby holds for Daisy. Gatsby's life has been spent in pursuit of love, and it is this pursuit that has given him purpose. Although he started off trying to create a fortune with the hope of winning Daisy, somewhere along the line he has become more enamoured with the appearance of success than he has even with Daisy. The illusion he constructs here is superficial (which nicely mirrors Daisy's superficiality). The quote suggests that the illusion is now stronger than the love he has--or anything else, for that matter. This is apt because his "love" and his "success" are both constructions of a sort--love is something that has lived longer in his imagination than in reality and success has been through corruption rather than honest means. This line reveals that Nick thinks that love is not really as important to Gatsby as he professes it to be, and that Gatsby's obsession is really about something more than simple love: he wants Daisy to be dazzled. The fact that Gatsby knows he can get Daisy's attention with glitter shows her superficiality; the fact that he desperately wants to do so shows his.

Gatsby had spent his life trying to build the fortune he believed would win Daisy's heart. They were both young when they first met, and Gatsby never outgrew his adolescent obsession with Daisy. He had imagined for so long how it would be when he finally met up and won Daisy over again, that the reality of it never seemed to faze him. He held on to the fantasy, rather than face the reality.

Vitality is also an obsession of Fitzgerald, and it functions as a motif or theme in many of his works. He talks about it directly in his autobiographical essays called The Crack Up, where he says, "Of all natural forces, vitality is the incommunicable one.... Vitality never "takes." You have it or you haven't it, like health or brown eyes or a baritone voice." For an illusion to have "vitality," then, would seem to be contradictory, because illusion itself is invented, so vitality could never be an "natural" attribute of it. In other words, Gatsby was doomed from the start.

The line is about Gatsby's obsession.  Gatsby had become consumed with the idea that he could one day win Daisy.  Gatsby had met Daisy some five years earlier and fell completely in love with her,  but Daisy decided to marry Tom Buchanan, who had much more money than he.  Gatsby believed that if he could be wealthy too, Daisy would be within his grasp.  He amasses a fortune much larger than Tom's, chiefly by means of underworld activities.  Gatsby erroneously belives that Dasiy will leave Tom and marry him instead.

Nick makes this comment as he watches Daisy...