In a post entitled Reinterpreting Deuteronomy with Sophisticated Theology, Russell Blackford critiques some theologians' attempts to airbrush out the rather clear instruction to go and massacre the Hittites.
I think the problem here is actually the attempt (whether by Christians or atheists) to interpret the Bible as a unified text.
Actually the Bible is a collection of different books compiled over several centuries from books written by authors with very different political and social agendas. Some books have been shown to have been rewritten versions of earlier texts, as the accounts in them are clearly conflicting.
Karen Armstrong has pointed out in her book about the writing of the Bible that the author known as the Deuteronomist was very interested in smiting and genocide, whereas other authors (such as Amos) are much more liberal. In addition, some Tanakh authors anthropomorphise God, and some make him/her/it much more abstract.
Add to that the many layers of Jewish editing and rewriting, and the attempts by Christian theologians to create some sort of unified theology out of all this, and to retrospectively try to make Tanakh texts predict the coming of Christ, and you have a huge mess.
I think it's a complete waste of time trying to rehabilitate texts like this. It's a much better idea to disentangle the bits of the Bible from each other and view them as separate pieces of writing produced by people with very different ideas of God. Biblical criticism has been doing this very successfully using increasingly sophisticated methods of textual analysis since the late nineteenth century.
It's also a complete waste of time trying to deduce anything about God (who doesn't exist anyway) from these texts. Though you can deduce a lot about the author of Deuteronomy.
I do think that the allegorical method of interpretation favoured by many theologians has some uses though - not in the way that Russell Blackford is critiquing, but in order to prevent people from thinking that it's alright to massacre people you don't like.
However, the historical deconstruction of the text is probably more useful. Perhaps the two approaches can be used alongside each other.
I like the comments of MH on Russell Blackford's post; MH also advocates historical exegesis of the texts.