Michael, the problem with your 'extremists are unlikely to win seats' argument is that they're also unlikely to win seats under FPTP. Not quite as unlikely, but still unlikely. Gerrymandering them out of the system still further nurtures their sense of victimhood (parallel to that seen by some extremist posters on this forum).
More importantly, however, extremists don't particularly care about seats. They're interested in influence, and in getting the debate on their issues. In the undignified scrabble for second and subsequent preferences, I can well imagine a right-wing Conservative candidate pandering to the BNP, and edging himself further to the right in order to do so. (Not that this is unique to Conservatives, Mr Woolas.) AV may stop the BNP getting seats, but it's a pretty good way of ensuring they get their policies.