In my opinion, it all boils down to a simple question : do you play that kind of game ?
The kind of game where, you know, bad luck happens, the players know the risks, they had a chance and could not convert, tough luck, game over, roll up new characters.
I know I don't play that kind of games.
But if you do, then killing them all is the most logical outcome, so by all means, do it.
But your question boils down to the social contract of the game - do your players expect that kind of things to happen, or are they in for a different game style ? If they signed on expecting to have their arses handed to them on a platter, it's OK. If they signed on expecting to be bailed out of situations they were in because of bad luck and shortsighted decisions, and having to suffer after-save consequences, then that's how you should do it. If they signed on expecting to have an easy time stomping over the opposition, you've broken the social contract already.
I don't believe in "the dice decide the outcome" at all. The GM and the players decide the outcome, the dice are only here to provide options that might not be obvious to them, but following, tweaking, or ignoring the dice results is their decision. In the end, if everyone is happy, the decision was a good one, otherwise, the decision is probably not the right one.
Thus the social contract - make sure everyone signed on for the same kind of game.