[veddox]

I would rather take it at face value, as a perhaps surprising but nevertheless fitting display of magnanimity and mercy.

Theoden has been restored to his right mind and character. The whole thrust of the his character plot (in the books) is that he ends his reign as noble as any of his forbears; freed from the influence of the lies of Saruman, he becomes an exemplary king. And one kingly virtue that Tolkien presents again and again is that of magnanimity to defeated foes: Bilbo doesn't kill Gollum (which Gandalf explicitly praises), the Rohirrim don't kill the Dunlendings, Gandalf doesn't kill Saruman.

"Many that live deserve death. And some that die deserve life. Can you give it to them? Then do not be too eager to deal out death in judgment."

[Attrecomet]

This magnanimity is also something prized in Earth-medieval kingship, too. Many a revolt against a king ended with the king pardoning the vassals that rose up -- only a king very secure in his throne could depose or even execute rebellious vassals. Of course, it's important that it be a common member of the nobility for this to work consistently. Against commoners, brutality was far less politically costly. And heretics (read: Kathars), who risk the Wrath of God coming over the whole community, are even less worthy of protection.