Is is possible to make transparent sprites with DirectX7? Not just one transparent color like in a gif, but using transparency bitmap (0..256).

If not, where can I find a free library to do this fast?

DirectX7 does not support this (alpha-blending), although Microsoft has been saying that it will for a while now. You will need to write your own blit routine to handle the alpha channel. Some of the free game libraries floating around have support for alpha-blending, but I'm not sure which or how well. Check out the MMX Enhanced Alpha-Blending article right here at GameDev.Net for some more info.

- Splat