Luthien, Huan and Sauron

[Tirinor]

I disagree with the pity angle. gollum was pityable, and in most ways "inferior" to Frodo. Sauron was neither to Luthien. Sauron was a leader and orchestrater of tremendous and deliberate evil. Gollum was acting out of personal wretchedness and pain. Big difference. It might be argued that Luthien showed the same pity to Sauron as Mandos showed Melkor, but I would also disagree with that. Melkor played the part of one reformed, and he had also served a sentence. not to mention he was dealing with equals in power, not bullying those of less power.

I think that it was a practical decision, as the Keeper and Akhtene have laid out.

Practicality doesn't sound too noble though, so to satify those who want there to be a-little-something-more to the choice to not kill Sauron, I would propose that the choice was made out of honor and properness also. Once Sauron was in a position of submission, to go through with the killing would be an execution, and I do not believe Tolkien ever wrote an execution executed by the good side (I might be wrong on that). so (back to practicality), the other choice would be to keep him as a prisoner. This would have been very inconvenient due to the hostile setting, concern for the present mission, and difficulty in containing a maiar. The only practical choice was to wound and discard.
One might say that it technically would not be an execution since his spirit would not have been destroyed, from some perspectives that might be true, but I think that from an elf's perspective it would not be true. and there is also the theory that has been stated earlier that a sauron spirit might prove to be more of a nusaince than a wounded sauron in a "body" would be.