Keats seems to have been quite fond of the expression, whatever he understood by it. It occurs in a number of his letters. Walter Jackson Bate (John Keats, Harvard University Press, 1963, 635) explains it as 'signifying the twanging of a musical instrument at the end of a refrain', but doesn't say how that information came to him. It was certainly used in that sense in Walter Thornbury's Life in Spain: Past and Present (1859), for example. A bit of a search via Google returns various other instances of similar expressions, such as:

M G ('Monk') Lewis' 'The Willow's the Wreath for Me' (Universal Songster, III, c.1827, 156) has the chorus

Sing twang twang lango dillo!
Sing lango twang dillo twang dee!
Oh! bring me a bunch of the willow,
The willow's the wreath for me.

Walter Scott, The Fortunes of Nigel, 1822, chapter 27:

'Would you have a tune on that ghittern, to put your temper in concord for the day? - Twang, twang - twang, twang, dillo. Something out of tune, sir - too many hands to touch it - we cannot keep these things like artists.'

'Fort Lillo; Or, The Dream' (Morning Chronicle, Oct 11 1809):

Fresh was the breeze, the sails were bent,
The jovial sailors sung twang-dillo

'The Knight and the Shepherd's Daughter' (C17):

Sing, trang, dil do dee'

... and so on. The wide range of situations in which forms of the wording are found would tend to suggest that the theory that the sound echoes that of a blacksmith's hammer was constructed to fit one situation only, without knowledge of other examples where it could have had no such significance. Ultimately it may mean no more than 'fol de rol' or 'tra la la'.