It seems that the reason the AI is so unreasonable is because they hate you so much. So what I found was that gifting the AI will improve your relations with them so that they will accept a more reasonable deal.
Here's how I figured it out:
I was playing a Portuguese campaign on VH/VH using Lands to Conquer 2.1 so I'm not sure how applicable my theory is to vanilla M2TW. I was attempting to win while only directly controlling 5 provinces + holy lands + America, so I needed to make vassals.
For my first target, I picked the Moors. And beat them into a bloody pulp, completing the Reconquista in a fairly rapid assault. Got a bit delayed when the pope refused to call a crusade on Cordoba. With my objective complete, I optimistically demanded their surrender.
I tried offering them some stuff, probably lots of money or Zaragoza or Pamplona. Needless to say, they refused.
After that I finally got a crusade a crushed their main army and conquered Marrakesh. I thought "Maybe now they want to talk peace..." No such luck.
So I went out to beat up their armies some more. I almost always released prisoners to try boosting my reputation up some more. This led to some hairy situations when my army inevitably got depleted. Desert calvary are scary when you are short on calvary yourself.



Before this battle I was prepared to settle for a ceasefire, but they refused that too. After this, their army was totally annihilated and reinforcements arrived. So I didn't want to walk away without victory.
Some people have said that it is easier to get a ceasefire or vassalage from the AI when they initiate the diplomacy, but Algiers is a castle.
So I sort of cheated, using the autosave. I found that they would only agree to be my vassals if I give them Cordoba, Granada and Marrakesh.
More random experimentation revealed that gifting Pamplona and Zaragoza boosted relations to very good. And they accepted vassalage for Marrakesh! It was a balanced deal. I tried gifting gold and tribute but they would not accept it. Finally I decided to gift them Zaragoza + 5000 florins. I had built almost absolutely nothing in Zaragoza.

This boosted relations to Reasonable. After that, I managed to get them to be my vassals for Marrakesh + 3000 florins a turn for 2 turns. A real bargain. Huzzah!!!


Conclusion: To get the AI to accept your deals during wartime, gift the AI your worst region and plenty of money to make them happy. Then they will be much more reasonable. The caveat is that I was using Lands to Conquer. Could someone try it out on vanilla?
P.S. You know how in Lands to Conquer the AI gets free money? Observe the following financial report.
Not that it isn't nice, but this was supposed to be a challenge!
I got 10k tribute for the next 3 turns. I mean, the Moors are supposed to be totally ruined. Marrakesh went rebel too because I demolished the town watch.
I'm no modder, but could someone please tell me how to fix this?

Maybe the money script can give money up to below the vassal threshold...
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