At the time, Harry's decision definitely seemed merciful, but over the years I've changed my mind, and now I think that Remus and Sirius (while they weren't exactly being responsible adults by executing Peter in front of the Trio) were actually being kinder to Peter. If they were going to use Avada Kedavra, then that's it, boom, Peter is dead. By putting him in Azkaban, Harry's condemning Peter to mental torture, where he has all his positive memories sucked away and slowly loses his mind. (And in the end, his actual death isn't that nice, either, so this really would have been the best ending for him!)

I think Peter actually loved his life as Scabbers. It was simple, peaceful. He had a family. I mean, he even bit Goyle's finger for Ron. And I honestly don't believe he would have done anything to Harry but I take Sirius's point. Still, if Sirius hadn't escaped, Peter wouldn't have escaped and gone to Voldemort...