I was going to comment in more detail, but the discussion seems done, so I'll just say this:

MitD's reaction is not at all genius-level, in fact, it barely passes muster as a lie. He's basically just using information about what he knows Xykon cares about - one of which is what makes a better 'plot', ie, who's more likely to actually challenge him. The only reason it worked, as far as I could tell, is it appealed to two things Xykon is now interested in: focusing on the goal at hands and putting Redcloak down. Since the attack by V, Xykon has changed. He now only wants to get this thing done and dusted and finish off getting the gates. He has decided that is what he wants to focus his power on and, as we've seen before, when Xykon decides to focus he is extremely dangerous. As for him wanting to put Redcloak down - the reasoning behind that should be clear.

Basically, Xykon has had character growth over the course of the story, leading to this in a way which makes sense - to me, at least.