My personal belief is that Iluvatar is not wholly Good, Nor wholly Bad. He simply 'Is' and is the prime source of everything.
This part is true, I think. He is simply there to create and bring things into existence. Maybe, for him, there is no 'good' or 'evil', but only 'extinct' or 'extant'.
Perhaps that is also why Manwe Sulimo, though the mightiest of the Valar, is not anything close to the might of Eru, since Manwe's heart is free from any evil (thus he cannot comprehend Melkor), while Eru's being consists of all the elements and themes of Arda (and perhaps more that are not of Arda).
The might of Iluvatar comes from the diversity of himself. Iluvatar was Everything, good,evil, right, wrong, hard rock, cold water, lithe dancer, wise old man etc. He knew of everything on this Earth while his creations knew only parts of the world. Manwe knew only good, Melkor erased all good from his heart until he knew only evil, and for all the Children of Iluvatar, each had his/her own knowledge of Arda, and none had the full knowledge of it.
Why all the 'good' people of Arda love Iluvatar is not because he is 'good', but because they are 'good' and 'good' stimulates love more than it does hate. Why the 'evil' of Arda hated Iluvatar is the same.
But back to Melkor. The question of whether he should
be pitied is one I cannot answer. It depends on our own temperaments. For a person like me, I would probably try and pity Melkor, because he is a wretched existence and he himself is not happy nor will he ever taste true joy. But then I cannot really find it possible to pity Morgoth because of the wreckage he has strewn over Arda and the pure beauty he has torn apart. It's too easy for me to take the point of view of those against Morgoth, because, well the books are written from an anti-Morgoth point of view. So, I'd probably just feel sad that he has ruined Arda.
For others, they might find it easy to mix pity with scorn and anger for Morgoth. More soft-hearted ones might even pity Morgoth enough to feel like they wanna give him a hug. ;) And angrier ones would of course, have only fury and hate towards him.
But my personal opinion would be that the wise would pity Morgoth, the rash would only hate him and the weak would be either resentful or jealous of him.