Dukat usually appears like he's trying to be a good person, despite all the terrible things that happened under his watch. But this episode breaks that down until he finally stops lying to himself.
I rewatched that episode just this evening, and completely agree; fantastic scene. Dukat is a delightful villain throughout the series, but this is one of his pinnacles of bastardy.
Imaginary Kira supporting his twisted logic was a nice touch, too; "Being reasonable only made us bolder"