Here's what I think:

No, I do not think Ozai should've died. Taking away his ability was worse. And unlike any other show, Avatar actually teaches you something. Besides all those other people died for other reasons. This is different. Aang's choice was far better than I could've hoped because he made the right one. It shows that life really is important in all forms, even if the person isn't good. Killing can taint the soul.

1. The right thing for Aang in the situation he was during the duel with Ozai was to try shedding his earthly attachments and achieving Avatar State by the book (i.e. by Guru's teachings), then use its overwhelming power to restrain Ozai without killing him. Yes, Aang would have sacrificed his love for Katara, but he would have saved the Earth Kingdom without becoming a murderer himself.

Iroh said, however, that Aang was right to choose happiness and love over the power of the Avatar State. In this case, Aang should have killed Ozai when redirecting his lightning (that was the only real chance of stopping the Phoenix King without access to the Avatar State).

In the show, however, Aang "was able to eat his cake and keep it too" due to the weird plot device of accidentally unlocking his chakra by hitting him hard with a rock. I don't know, it just looked too much like a cop-out to an otherwise very well set up moral dilemma.

2. What happened to Ozai was not worse than death in any way. Basically it's just solitary confinement with confiscation of the instruments of crime (taking his bending away). I bet any real-life criminal would prefer that to the death penalty. And Ozai seems to be taking it pretty well, the composed strong-willed bastard he is. Unlike Azula, who probably did wish for death at the point of her being deserted, defeated, and chained like an animal. But that would have been her craziness speaking; the sane Azula would also prefer confinement to death. If not anything else, living at least offers you hope. Who knows what may happen tomorrow; both Ozai and Azula know people pretty well and have lots of manipulation experience, with Azula's bending intact there's at least an outside chance they could somehow escape. Or fake contrition and be let out for good behaviour 8=)

yes yes and yes! taking away his bending? thats it? come on! aang was meaner to the earth king and his soilders in "the avatar state"

but i understand that this is just a nick show and some people were already complaining about the violence earlier in the show -_-

While I don't think their was a need to kill the Fire Lord in that position, when he could spare him. It seems more of an act of Aang's selfishness of his way of life rather than mercy.

Can an Avatar have his own beliefs at the cost of the world? An interesting quarry, ruined by a sort of copout.