And yet in that story, everyone still tried to save that whole species anyway.
Well... only Chaldea actually... Baobhan prayed to Cernunnos so that he would destroy them after what they did to her and Morgan, Barghest realised all of the Fae had to be killed and became a calamity, Melusine didn't really care about them either way, even the land itself gave birth to Oberon in "a bout of self-hatred", Morgan wasn't even trying to save the Fae, she completely gave up on them and chose to save the land instead of it's people. Humans didn't even get a chance to fight back at neither Morgan, Aurora, calamities nor the Fae.
Even Castoria didn't fight to save the Fae but to prevent Cernunnos from destroying the rest of the world, she even explicitly says that she wouldn't care about what he's doing if he hadn't become a threat to PHH as well.
Regardless of that, the part of my argument that compares Tonelico and this Merill is unrelated to whether or not she should be punished. I set Tonelico as an example of justifiable hatred towards a whole species, not making any judgement of value regarding this fairy's actions, but trying to explain that she isn't even acting on the misguided notion that humas or elves are irredeemably evil.
She's acting out of hatred for everyone that's not herself, as much of a victim as she might be, she still chose to nurture her hatred to that degree, she's the only one responsible for her own feelings, as our own selves are one of the very few things we have actual control over, as limited as that control is.
Think of it this way, when do you think she became an achieved magician? after or before being eaten by the dragon? as far as we know the requirement to survive being eaten by the dragon is being strong, as such, the rational conclusion is that she was at the very least as strong as Amon by the time she arrived to the dragon's belly. How long do you think she got to live and see the world? yet, the one reason we get for her hatred is that she was bullied, we don't see anything of her life between being a novice at magic and being eaten by a dragon, and I doubt she was already strong enough to survive being eaten by the dragon when she was still bullied by those kids.
She chose to foster that hatred, even if the world around her harmed her, it was still her own choice to hate it back or not. Think of Lily for example, she lived in a world that harmed her without a good reason, she had good reasons to hate the world back, but she didn't. You could argue that having a friend was bound to help with that, but we know what the world did to that friend, just like how Merill's parents died.
My idea is not to equate or weight one's suffering against the other, but prove that becoming hateful of the whole world is not something anything else can choose for yourself.
Since you seem to be familiar with Type-Moon I'll also add this quote from HF:
Then...
It would mean that the world wasn't weak and bad.
She was the only cowardly one for not looking up.
And there were people who awkwardly tried to love her.
You can't correct someone and lead them to the right path if you don't aknowledge their wrongdoings. That'd be a blind man leading another.
Justification is one thing, but how about practicality?
You want practicality? then prove to me that someone can be saved before they do something that can't be fixed. You don't know how long it'll take and neither can prove it'll ever happen. You want pragmatism, then prove to me that she can be saved without endangering other peoples lives in the process. It's simply impossible to prove it, and as long as that's the case you are playing around with peoples lives as if they belonged to you, do you think it's fine to endanger other people without their consent for the sake of one person? How could that be fair? How could it be "practical" to endanger the lives of many of the sake of 1?
She already tried to kill Amon, you can't be sure she hasn't done this to other people before, and it sure as hell didn't look like her first time. Someone who's killed someone to rob them of their possessions is much more likely to do so in the future than someone who hasn't done so before, if only because there's a track record. And killing someone in self defense or in the context of war is way different than assaulting someone you just invited to your home, it implies a completely different mindset. So, ultimately you have to weight the chances of saving her(success) against the chances of her not changing her ways(failure), which ultimately will lead her to kill someone in the future in the same way she tried to kill Amon.
If you consider that to be a rather extreme perspective, then how many resources should go to protecting human life? If human life's the priority, then taking your chances is wrong. Playing dice with other people's life for the sake of those standards is hypocritical. Just the possibility that this might ruins someone's life should be enough for you to rethink it.
Rehabilitation is not something that should be done for the sake of "saving everyone" or because killing is wrong, that's just hypocritical as you are potentially endangering innocents for the sake of a previous offender. The goal of rehabilitation should always be born out of what kind of future we wish to see, it has nothing to do with practicality. Take eugenics for example, Iceland has the lowest percentage of Down Syndrome cause of this, eugenics is the practical best way to go about preventing genetic deceases, but you can bet my ass I'd hate a world in which this practice becomes the norm.
Also, saying "this person is like this because of the system" and then saying "this person can be better if we help them to be", implies that you won't admonish/change the system despite acknowledging it's guilt. If their environment is the one who decides the kind of person they will be, then you are also taking away a significant chunk of their agency. A virtuous person won't always become wicked if put into a hellish environment, and viceversa, hence, there's a decent amount of inherent independency towards the environment. You can make an argument for infancy being important in someone's development, but's still not deterministic.