Hi, SHARK, long time since I've seen your threads around. Been busy? Sounds like everything's going fine over there.
For one thing, it's impressive having 16 PCs there. You must be one heck of a DM to be able to manage 16 characters, and your players must be good to be able to actually juggle those multiple characters while role-playing.
Anyway, praise aside, let's look at the situation at hand. For one thing, the people from the Vallorean empire seem to come across as something similar to the Spanish in the Americas, and part of the play-acting represents stuff that I probably wouldn't agree with even while playing a character anyway (the Cleric/Paladin bit going around proclaiming his superior civilization and religion bit) so if I were there, I'd probably be acting somewhat like the Elves of the Seren Empire. Of course, things aren't totally that simple (I suspect they never ever are in your campaigns, eh?

). Again, I blame the alignment system
Just kidding. Well, I don't know really. For one thing, as a player, I'd think I'd have my character slaughter all the Gnolls (out of rage for that which was done to the girl) right then, side with Axel and co, and probably feel some measure of guilt much later after cooling off. It somewhat falls into a set of questions: do I think they're evil? if so, do I believe that redemption is a possibility? For the humans, it could be seen as removing possible threats to the safety of all Good folk, like what Axel said. But can and should one be allowed to slay ALL gnoll-kin without consideration of them as individuals? It doesn't take too much to step beyond that and declare that anyone who doesn't share similar beliefs as evil and thus give themselves fake justification that everything out there that doesn't conform requires extermination. And anyway, should there be gnoll-kin who are actually innocent out there, slaughtered just because "it's better that way", well, I don't think we're really as Good as we claim, are we?
On the other hand, it's remarkably hard to actually do what the Elves wish to do, which makes me wonder. Oh boy...
How well do I think the different alignments will work it out? Not for long, I guess... while they may work together for a while to achieve common goals, they seem to have too many differences in opinion, choice of methods and personality to keep at it for long. I can almost imagine an accident with those Sleep spells earlier and a lucky, rabid gnoll taking advantage of that opportunity...
Anyway, interesting post. Hope to see more of your posts sometime, preferably some of those High Magic bits which Dragonblade mentioned, since I've never gotten to play in such a campaign, nor was I really exposed to fantasy to actually envision a High Magic campaign.