Seeker, you have raised a very important question. Many Christians and non-Christians have been understandably perplexed about the issues you presented. I have heard a number of theories that have tried to explain this. For example, a man I know who works as a tour guide in Israel feels that God never really ordered those Old Testament killings, but that the stories were told in that manner to serve as military propaganda (i.e., to frighten the enemies of Israel).
On another note, I seem to recall Lee Strobel presenting a very good explanation of these things in one of his books (I believe it was The Case for Faith). Unfortunately, my copy of this book is temporarily in storage and it will be awhile before I can get to it. I could try to bring up the points he made from memory, but I am afriad I could not do justice to Mr. Strobel's material, and therefore I will set that aside for now.
Hence I will now put my own spin on the seeming contradiction between a God of love and mercy, and the bibical accounts of slayings that happened in His name and, according to the text, under His direction.
I will begin with an example. Let us say that a physics expert is hired to teach elementary school mathematics. An onlooker observes this professor in action with these kids and sees the kids being taught the basics of addition, subtraction, multiplication and division. Now, what if the onlooker said, "This professor is not truly a physics expert, because he is not teaching any of his students physics!"? Such a proclamation, of course, would be silly, because no one is capable of learning physics until one first learns mathematics.
God had a much bigger task at hand than teaching math. When God revealed Himself to His Chosen People, He had to teach them about Himself, and about the relationship between Him and humanity. This included God teaching people about love.
As I stated in my initial post, all humans are "programed" to love, but this does not mean that we are automatically experts on love and do not need to be taught anything concerning it. For example, a man can readily see that having a wife and children is a great thing, as love goes, but what if he decides that it's ok to take another man's wife and children? This is wrong, even if done for the sake of love. Thus, although we are programed to know about love and to engage in acts of love, God teaches us how to love properly. And, just as the professor in my above example did not dump physics on elementary school students, God did not dump all the various teachings of love and morality on Abraham. He started with the basics and built upon them.
Furthermore, the early Hebrews did not have an understanding of an afterlife (as that was "advanced course material"). They believed that any rewards and punishments God would give a person had to happen within that person's life time. That is why some of the Old Testament writers were bewildered at the fact that bad things sometimes happened to good people, and good things sometimes happened to bad people.
The first thing that God taught the Hebrews about Himself was that He was Life Itself. If you had God then you had life, if you did not then you had death. Because of this, being an idol worshiper was seen as being on a road to death. Furthermore, the followers of the Canaanite religions engaged in many wicked practices, such as temple prostitution and wholesale child sacrifice. God told the Hebrews to avoid the ways of the Canaanites and to eradicate their practices if they started to "infect" the Hebrew culture. Many times the Hebrews found themselves attracted to foreign ways, and they needed harsh lessons to keep them in the straight and narrow. These were necessarily lessons in life and death.
So here is the main thrust of all this:
A) The Hebrews needed to understand that foreign ways were the ways of death.

All foreign practices had to be eradicated from their midst.
C) The covenant between the Hebrews and God was a two-way relationship. The Hebrews were not supposed to sit back and let God take care of everything. Rather the Hebrews had to live their faith and even fight for it. The Hebrews had to do their part in the world as being "agents" of God.
So what did the Hebrews learn when engaging in military campaigns against the Canaanites (and what did they learn when Elijah killed the prophets of Baal)? The learned, in
very tangible, concrete terms:
1) Sin must be radically and fiercely combated. If the Hebrews had to take up arms against the Canaanites to root out their sinful ways, then it is also important for the individual Hebrew to combat his own sinful ways, and take up spiritual arms to root out the sin in his own life.
2) God is all-powerful. Generally speaking, the Hebrews were victorious over their enemies, even when the odds were heavily against them. The Canaanite "gods" were powerless to protect their own people. Furthermore, the ancient people believed that gods were tied to specific regions. The Egyptian gods, for example, operated withing the geographical boundaries of Egypt. The military campaigns of the Hebrews showed that God could operate well outside the boundaries of the Promised Land (i.e., His territory) and, again, the other "gods" were powerless to stop Him, even when they were defending their own turf.
3) God is the way of Life and the Canaanite ways led to death. Remember, the ancient Hebrews believed that the Canaanites (like everyone else) had to meet their fate in the here and now. Because the Hebrews had a hand in these people getting wiped out, they saw this principle dramatically fulfilled in the here and now.
4) Not only did the Hebrews learn this lesson, but the foreigners learned it as well. Hebrew priests and Canaanite priests could have debated theololgy for ages with neither side gaining any headway. But when a Canaanite priest watched his armies get wiped out by the Hebrews and then see his town get ransacked, it spoke volumes about who was truly Boss.
We could argue that God could have arranged for all these lessons in a "nicer" way, but it was a different world back then, and a very violent one. Violence resulted in people abusing their freewill to inflict harm on others, and God had to teach His Chosen People things within this violent reality. Basically, the Hebrews had to know how to fight.
Over time God could expand upon His teachings. But before he could teach about love and morality, He first had to teach about life and death.
Furthermore, the Hebrew conquest of Canaanite towns was not done in surprise attacks. People were given advance warning to leave, and they may have been given the opportunity to convert as well. But what happens if they don't leave and don't convert? If left alone, they would carry on like they always did, sacrificing children and trying to talk the Hebrews into worshipping their gods, with all the sensual temptations of the vices at their command (lust, greed, gluttony, etc.).
Those were drastic, primative times and called for drastic primative actions. Moreover, these actions were commited by people who did not yet have the same advanced understanding of love and morality as we do today. We are like physics students looking at elementary class math students and wondering why they are not using more advanced equations to solve their problems.
I hope this was helpful. If anyone has a copy of The Case for Faith handy then perhaps he or she would be willing to present Lee Stroble's points regarding all this. I probably touched on some of his material above.
God bless,
-Rev. Eric