Now, now, I see a morale/fear mechanic as highly desireable, but I have to say that torture for cruelty's sake is both out of character for the dwarves and not actually adding anything to the game. This thread is about intimidation though, and that I see as just fine; whether it be "green rain" or a row of stakes with bodies on them(say one for each citizen killed in the last seige)
Torture for info is not something I see as possibly being part of the game, mostly only because info is useless though. If you could quizz the goblin leader on where his hideout is and then actually send a squad out to take the fight to them, that would be cool. I see that being implemented in adventure mode first though, and yes this is highly susceptible to player cruelty, but I feel that it isn't encouraging it. (as torture for torture's sake, also suggested in this thread, definately is)
So basically, one shouldn't encourage players to be bastards, but if you try to stop them from being sadistic you're only wasting your time and taking features away from those who wouldn't "abuse" them. People will find a way to make torture chambers anyways, it's a part of the fanbase's culture. It shouldn't be encouraged, but don't let fear of people taking the idea and running away with it paralyze you.