I think that halflings will make better Paladins than Fighters, for a couple reasons.
As pointed out above, halflings can have a generally high AC compared to most characters their level. Let's say that the Halfling has an AC (base) 1 higher than most in his party. If he is the defender, this sounds about right. Now, he gets a +2 when 2 or more people larger than him are around him. Okay, great, now his AC is 3 higher than most other people...
As someone suggested above, this defeats the purpose of marking inasmuch as there is still no disincentive to attack the Fighter instead of the 'squishy'. The Fighter is still making it harder to hit his friends, but he's not taking the damage.
Now, the Paladin has a different marking technique. Attack him or take damage. This can be quite a bit better as an incentive to attack the Paladin rather than one of his friends. Also, if they still choose to attack the Paladin's friends, the Paladin can use LoH to give them a 'free' Healing surge.
Also, I have a sneaking suspicion that Halflings, being Small, might actually get a few damage penalties somewhere along the line. As such, the Paladin's ability to do radiant damage and their relative lack of reliance on their weapon vs. the Fighter should send Halflings in that direction.