Regardless of the morality of the decision, the tactical logic of openly and boldly denying the Vampires bargaining stance was a poor call. Even the most ill concieved plan of rescue at least has a chance of saving the hostage, but the Paladin in this scenario basically said, "kill her, don't kill her, you're still dead". I would impose a -10 Wisdom penalty to represent the actual mental faculties of the Paladin, but, that's me.
On to the next issue, I think the Paladin broke the Lawful side of his alignment, and at least skirted the Good/Neutral/Evil axis here. From what you're describing here, this seems to be a military type mission, and once you take prisoners in a military campaign, you do not make arbitrary decisions to suddenly kill them because the enemy forces just fragged a buddy of yours. It's tempting, but resisting temptations like that is what seperates the good guys from the bad guys.
He clearly violated the Lawful side of his ethos, making an on the spot judgment without taking time to think it through and consult with others. Lawful characters are supposed to make calls based on deliberation and methodical process, not snap judgments based on their own personal thoughts or opinions.
In any case, this sounds like a fantastic campaign. The way you described the situation and the way it was occured was very thematic and entertaining. If your players get treated to the same descriptions, they must be having a blast.