I'd say this was our first (or close to first) glimpse of Dukat's insanity. He was controlled and proud at the beginning of the series, but things started to change when he couldn't gain the respect of the Bajorans that he so desired, and then he really snapped after his daughter's death, and through the rest of the series we see him spiral into deeper and deeper madness. In some cases, evil comes in the form of madness (probably the scariest form of evil). And I believe that's true in the case of Dukat at this point in the character's development.
Some people say this was a mistake by the writers, and this turned a very complex, interesting character into a 2d "cartoon." I respect and understand that opinion. However, I see his daughter's death, his madness, then his involvement with the Pah Wraiths and the end of the series as part of this incredible character's sad and painful journey. It wasn't until I joined this board and started seeing the other opinions that I learned how much people really truly hated what they did with Dukat, Kira, Bajoran religion/politics, Benny Russell, Vic Fontaine and some of the other hated aspects of the show that I actually love. But that's okay. To each his own! I can't abide what they did with "Into Darkness," but others are head-over-heels for it. That's the beauty of Star Trek. There's truly something for everyone!