'you can either kill them "then and there" (thereby enhancing your own dread rating [i think it may also affect enemy morale - not sure on that]) or keep them until the battle's end when you can ransom them.'

Is there a toggle during battles of wether to take prisoners or not?

Also if your dread rating is high does the enemy tend to fight to the death rather than surrendering?

It would seem to me that a soldier would surrender if he considers is position on the battlefield as hopeless, i.e. surrounded or already fleeing, but if he expects to be killed anyway then he would fight on.
High dread could also lead to enemy fleeing more readily however and very low dread to enemy surrendering easier.