Okay, I'll try to address everything else that has been asked or said.
solitude_peace: That may be the case in some instances, a mage buffing, generally can have a mage in a weak position, as a number of them are not melee types. But remember there are other casters, multi-classed mages who excel in melee, clerics, or several other posiblities. But I do get what you are saying, a number of casters would be at a weakened position.
silverdragonams: Yes, I would recommend it, provided it wasn't a dispell that was asked for(i.e."Hey Sara, could you dispell this invisiblity from me?"). While any of the dispells don't take hostile setting into account(i.e works better/worse, changes DC's etc), some people do consider it an attack, in certain situations, which I would imagine the discussion we are having, falls into the category of certain situations. Myself, as well as several others I know, if someone were to cast a dispell on us, and we had not asked for it to be casted on us, it would be considered an attack, heated arguement or not. Some of my characters may have more tolerance for it than others, but frankly, if I cast stuff on myself, then someone casts dispell, either for the heck of it, to show they aren't intimidated, or whatever, I'm not happy, I cast them for a reason, and the dispell is an attack by removing them.
Lord Droke: I do have to agree with what you say as well. Some spells like bulls and True Seeing, especially with your character, are almost always casted, and when one fades you recast as do a number of others in similar positions, but you also have to take into account, not everyone is a mage/cleric etc, so to a "dumb fighter" as we might put it, they may not know the difference between say "Light" and "Finger of Death" both are just words being uttered and fingers being waved, and unless the opposing person passes their spellcraft check, then the likelyhood that they know the difference is little to none. I know my barbarian wouldn't have a clue, and if she had another confrontation with Vilmi and Vilmi casted one of those spells, my barb may very well knock Vilmi on her butt. Like you said, it's all about how it falls into the players RP.
All in all, I recommend Rule #0, otherwise known as common sense, sure, there may be situations arise, that we may not have thought of or discussed, just try to do what would be the best. Hostile setting in some situations may or may not be necessary, and it's one of those things that we try to let players judgement do it's thing. There are some things where hostile setting is required, and not using it can get you in trouble, but a heated arguement, if you have a feeling that the actions taken during the arguement may result in CvC happening, then, take the precautions of getting hostile set. Setting hostile doesn't mean you are going to, but can save headaches if CvC does happen. Basically I think everyone that has spoke up here really has the right idea, and have handled situations like this in acceptable ways.
On the same note, I don't want to see people metagaming the hostile setting, as well as take into consideration some adverse effects of setting hostile. Summoned creatures, familiars and companions will generally attack someone that is hostile to you, I know this situation has come up before so keep that in mind. And don't be buffing up just because someone logs into the server and sets hostile, or even logs in and doesn't set hostile, those server messages are OOC, and buffing up because of those is metagaming, and I have seen it happen a number of times before. Not saying that it has happened recently, or here, just that it has happened.