Realistically, the thieves should scatter the moment the mark reveals himself to be armed. "He's got a sword, mates. Cheese it!" rather than risk death or maiming, or a murder charge. Whether they're children or not.
However, since the script doesn't do that, I don't think that a Paladin would just stand there, until the kids beat him to death. Retreat is the only viable option, because I agree that any good character would find it very hard to attack children, regardless of how justified it was. Especially since, there is no subdual on NPC's that I'm aware of.