As has been pointed out, leaving her there is the worst thing they could do. If she gets free, she'll be more likely to want revenge on the party. If she doesn't, then they've sentenced her to a slower, more painful death than an execution. In other words, she WILL escape and actively try to screw over the players, at least, she would if I were the DM.
Executing her would not be good either, especially considering the paladin's god advocates converting drow when possible. It would not be on the same scale as slaughtering an innocent person, but if I were the DM, I'd give the paladin a warning from his god -- nothing more, if this is his first offense of the sort (especially since he's at least thought about the morality, even if he came to he wrong decision). An appropriate warning might be to turn off his <i>smite evil</i> ability temporarily.
Simply setting her loose is not an evil option, but it's not especially wise. She probably wouldn't have a personal grudge against the PCs, but odds are at some point she'll end up fighting against them all the same. As DM, I'd ideally have her seriously screw over the PCs, but return the favor and spare them -- ONCE. After that, most likely the party ends up converting her or killing her and feeling bad about having to do so.
I think the best option is to keep her as a prisoner. The party has her stay with them, but keeps her in line using magical means (<i>Mark of Justice</i>, <i>Geas/Quest</i>, or the like) or simply keeping her in manacles. In either case, the PCs have her swear not to betray them, under a <I>Zone of Truth</i> if possible. They destroy any holy symbols she has and confiscate any weapons (maybe allowing her to keep a quarterstaff or something if she has a <i>Mark of Justice</i>), but they let her keep any armor so she doesn't get killed (and as a show of good faith). Also, they keep an eye on her at all times, and make it clear that the party will execute her at the first hint of treachery. Otherwise, they treat her with as much care, respect, and dignity as anyone else -- if not, she'll never convert. (Tolkien said that Gollum would have been won over but for harsh words from Sam.) If she proves trustworthy after a time, they can relax the restrictions and hope she's come to like the PCs rather than resent them. DMing in this situation, I'd reward their efforts unless they treated her poorly (in which case she makes it a point to exact revenge). To make it interesting, though, I wouldn't let her conversion be that easy. One possibility is that she leaves the party at first opportunity, and develops plans to conquer the world, release an ancient evil, awaken Lolth, or what-have-you. Then, after years of work building up a powerbase and planning, she begins the plan, only to discover -- suddenly, and in the most horrible way possible -- that she has a conscience. One way or another, the PCs get involved and stop whatever she's done, and she becomes good, assuming she survives. Another possibility is that after being involved with the PCs for some, she genuinely wants to become good. But it's HARD, and everything is so tempting. She causes lots of accidental trouble for the party until she finally gets the hang of this "Good" thing.