Definitely go with platemail and a rapier, and style him after a Spanish Conquistador - Ral Partha actually put out a troop of Dwarvish Conquistadors back in the day, so if you could dig up one of them you could have the perfect mini for him....
Lord of the Underhill. A grizzled gnome that prowls caves and “cleanses” the savage races, imposing his will to ensure his people rule the caverns and tunnels beneath your feet. He cares nothing for the surface, but adventures there with his party to scout for threats to his people.
I don't have any problems with gnome paladins. Stat wise they are almost as powerful as other races and are able to hold their own. So yeah I encourage my players not to be afraid of preceived racial roles. I'd welcome cannibal* halflings or gnome paladins any day.