Aaron,
Excellent points.

Yes, I'm not a lawyer but, I believe the listing agent ultimately has the responsibility for all aspects of the presentation of the home for sale and in the worst case they probably risk more than just their reputation, I can imagine a situation in today's litigious society where buyers would file suit over undisclosed property defects where photos were doctored and the buyer felt they were deceptive.

I think handling a request for photo modification as you describe (Documenting the request in writing and advising the agent of the downsides of the modification) is an appropiate way to handle such a request.

Hire a qualified attorney to negotiate the short sale for you.