Well business wise it may make more sense to fork android and ditch WP.
Only in the short term... at best. I think forking Android would be a terrible business decision. There is only so much you can do with an OS until it is no longer compatible with the main branch, over which Microsoft would have no control. Taking Android and integrating all of MS' technologies, while keeping it compatible with Google's annual updates would be prohibitively expensive, even for MS. If app compatibility is what you want, MS would be far better off just implementing an Android VM, like BlackBerry did. If all you want is the same amount of configurability as Android, then MS would be better off just pushing WP further in that direction, but obviously that isn't the path MS envisions for WP.
An independent Nokia should have made Android phones from the start, of course, but this project does seem unlikely to survive the Microsoft acquisition.
If you are saying Nokia should have committed themselves fully to Android... maybe. It's impossible to say if that would have changed anything about Samsung's rise to king of the Android space. I'm pretty sure Nokia would also have sorely missed the annual injection of half a billion dollars from MS.
I doubt you are saying Nokia should have made both WP and Android devices, because that would obviously have been a disaster.
I am fine as is with windows phone but if Microsoft does in fact release this phone, my confidence in Microsoft is gone then.
I have a completely different view of this. I don't think it would be much of an issue for MS to release such a device, because these devices aren't competing with Lumias or Galaxys or any other smartphone for that matter. These devices are competing with expensive feature phones or $50 off-contract Android junkware. If MS wants to compete at the lowest tier of the market, it's far better to do it with Android than to mutilate WP's chassis specs to become compatible with such crippled hardware. Slap a few MS services on top and it becomes the perfect platform to pull in future WP customers once the current WP8 chassis spec become cheap enough to compete in the sub $50 range. It's really not that bad an idea.
I'm not saying it's going to happen though. I too am sceptical this device will survive MS' acquisition, but MS could definitely do worse.