I will say that Dwarf Mode Loyalty Cascades are certainly Fun while they last, but are probably something you only want to do once just for the hell of it, much like a nuclear catsplosion.
In the interests of being clear, when you look at the profile of a dwarf, you can see the bit about "Is a member of such and such civ, is a member of such and such fortress government". When the military completes a kill order on the Dwarven Liason/Diplomat/Caravan, however, the complicit party is labeled an enemy of the civ. This causes other dwarves to flee/fight the traitor. However, since he is still a member of the fortress, dwarves who attack him become enemies of the fortress. This cycle continues until just about everyone is dead.
I do think there is more research to be done on Loyalty Cascades, as in the one I caused I noted dwarves who were previously enemies of the civ revert to civ membership for some unknown reason, and situations where a traitor would be listed as an enemy of the civ but a member of the fortress. One of these days I'll actually establish a test fort in an attempt to create an entire fortress who are enemies of the home civ and to document the specifics of how Loyalty can change. I'd do it now, but I am lazy and currently invested in Quake Live.
For anyone who decides to brave such ventures themselves, I advise forcing the military to stand down after the treasonous act is done. Otherwise, the military autoattacks enemies of the civ even if they are no longer members of that civ; this includes fellow squad members. It is also worth noting that civilian dwarves will flee your traitors as though they were an enemy, and vice versa; this behavior is ultimately made my fortress crumble to its end since nobody could finish off the crippled traitors who were in front of the booze supply.