In regards to war: Sadly, I don't think the Dominion was open to alternatives in the short-term, and the Federation had to acknowledge that. With the Founders, the Federation wasn't facing a political rival with which it had a long if troubled relationship lending itself to a form of understanding, as with Klingons, Romulans, Cardassians, Tholians, etc. This time, it was facing a fanatical opponent convinced that the only way to keep themselves safe was to aggress against and control others, and who had set up a society dedicated to ensuring they could do just that. Unlike those other antagonist cultures, the Dominion wasn't working within a network of treaties or established borders in its dealings with the UFP, able to be held at bay with diplomacy, political maneuvering, or occasional calculated displays of strength. It was too alien to the established Alpha/Beta Quadrant status quo for the short term, too disruptive to the balance of power in its blatant aggression and too powerful and driven to sit back and let the Federation be.
I think it's worth noting that when the Dominion finally moved in force to the Alpha Quadrant, Starfleet was willing to collapse the wormhole (presumably running the risk of alienating Bajor) as an alternative to conflict. They made every effort to avoid war; it's just that Changeling Bashir sabotaged that effort. Even in the aftermath, the Federation didn't attack Cardassian space right away. Only when they felt they could no longer ignore the obvious - that the Dominion was going to keep sending ships and personnel through until Cardassia was one big Dominion war machine, and then they'd pretty much inevitably use it to launch an invasion of other Alpha Quadrant nations - did the Federation act; by mining the wormhole, not attacking directly. Only when it then became clear the Dominion would attack DS9 did Starfleet launch an attack on the Torros shipyards. I don't think the Federation was ever presented as eager to fight a war; they just happened to find themselves in a situation they hadn't been in before, namely threatened by an invading force of comparable or greater power that was fanatically dedicated to imposing its own order on them.
I agree that Odo's compassionate gesture was more in keeping with the Federation's ideals than some of their own actions during the conflict, but he has a strong advantage here; he's a changeling, and so exempt from the deep, unquestioning distrust the Founders have for solids. Would the Founders have been willing to stand down and put their faith in the Alpha Quadrant powers if anyone but Odo were to make the gesture? And for his part, Odo tried to demonstrate that the Federation wouldn't be brutal or malicious in victory, and on the whole wished the Dominion no harm. So he was making a case for the Federation; even if they faltered somewhat during the war (and that's an inevitability of war, that it challenges personal or national ethics), they at least succeeded in showing the one person who stood a chance of "reaching" the Founder Leader that they were a principled and benevolent people. At least, Odo was willing to trust in the Federation to be the society he knew it tried to be. As he told the Founder Leader, he'd be the first to acknowledge the Federation's flaws....but a desire for conquest isn't one of them.
For a Founder to place her people's fate in solid hands must have been the hardest decision in Dominion history. Odo certainly showed the best of himself there, but I think it's important to acknowledge that Odo was able to succeed in part because the Federation had shown him enough of themselves that he
could trust them with his people.