I think divine might is fine as is. Balance-wise, it's fine... certainly no competition with a fighter, who gets +2 or +4 to every attack, while the paladin gets it for 5-8 rounds per day. Many fights last 5+ rounds, so it's a non-trivial limitation.
Plus, it takes a feat. For a paladin, that's 1/7th or 1/8th of the feats he'll ever take. Along with its prerequisite, it's 25% or more of his feats. That's a lot.
As for theme, I think it's fine. Smite evil is pretty weak, in my opinion, which is the only reason it's threatened by the power of this feat. If smite evil were better balanced (2x level in damage), I think we wouldn't be having this discussion.
I think tweaking the power of this feat down would make it unusable. Turning your damage to holy damage? How often is that really going to be useful? Especially when you have bless weapon as a spell.
Of course, if you meant for it to increase damage *and* turn the damage holy, then I think that's definitely cool (though smite evil should probably have that too).
Anyway, I think paladin is the class most in need of a huge overhaul. 'Twere it up to me, they wouldn't get spells at all, but something more like psionics where they have a number of points per day, and have several different supernatural abilities that use their holy power. I don't think paladins should be spellcasters so much as direct channels of holy power. Let the clerics wave their hands and mumble their verbal components, paladins should just channel holy power directly into the form they want.
-The Souljourner