I think it made sense for her to be on the station. It was the only place she wouldn't be looked upon as a mongrel or an enemy, and quality of life concerns had to override any increased for her being on the station instead of the planet.
Some of the way she was used was a little awkward, like her odd romance with Garak, but I don't find Dukat's affection for her awkward. His legitimate children had been jaded and hardened by Cardassian culture, and he was probably an absentee father. He was a fact to his legitimate children, a part of their status, rather than a loving presence. Ziyal was the only one in the galaxy capable of openly giving him affection.