I agree with BigMick saying that there is a valid argument that rotation should be dropped or at least toned down at the start of a season in order to get a good run going. There is a very valid argument that its easier to bring one or two players into a side and change things around a small bit when the team are on a fine run and confidence is running high across the entire squad. You can see Man UTD doing this, seamlessly introducing the likes of Darren Fletcher, John O' Shea and Wes Brown (who are surely no better than our squad players) into the side.
However, those in favour of rotation would attribute our strong showing in Europe to many players being fresh and being able to employ Rafa's high tempo pressing game in Europe against tiring opposition.
I think Benitez himself is aiming for a situation where he will have a squad of 25 players who he rotates at will, selecting horses for courses, always keeping guys on their toes and keeping the main players fit for the bigger matches. So far this system IS WORKING in Europe, but is not working in the Premiership. I do not think its a matter of prioritising one competition over the other: Benitez has always admitted that he won't consider himself an unqualified success at Liverpool without having won the Premiership yet the financial pressures (and indeed the football prestige) of the Champions League is so much that Liverpool cannot afford to neglect Europe and focus on the Premiership. I think rotation has worked for Europe - you cannot argue with results - but has failed in the Premiership. I think the reason it has failed in the Premiership is down to two or three reasons: 1. Benitez occasionally rotates the wrong players in Premiership matches. 2. the players are still not 100% adapted to the system (i.e. one or two of them who come in after being left out or "rotated" for a few matches look rusty and lethargic) and 3, (most importantly) we are still three or four players short - on the flanks and up front - of being proper contenders for both the Premiership and the Champions League.