Looks like a loyalty cascade, when your soldier killed the traitor he became the enemy of your civilization, so your other soldiers are attacking him now, and are becoming an enemy too, as he is still a member of your civ...rinse and repeat.
Get the unarmored squad out of there ASAP, seal in the fighters and wait it out. I think you have lost all the fighters, but you can still save the fort before it escalates any more.
Someone with more experience with warlock spies could have more to say, I don't know if this is supposed to play out like this or not. Probably yes.
Next time if you have a suspicious dwarf build a temple, burrow the dwarf there, and pray for Armok's help, that should cure him.