I decided to go ahead trying to repair it, and I'm happy with the results. After bending the rusted metal back into shape, I started out using 40-grit sandpaper and a Dremel with a rust removal brush to remove paint and the brittle rust. Then I applied rust converter to what remained to prevent it from spreading.
For reconstructing the rusted-out part of the wheel arch, I asked the guy at Napa for advice choosing a filler material, and ended up going with a fiberglass resin. He thought plain Bondo would be more brittle and might break if rocks or road debris got kicked up.
To begin with, I cut (well actually tore) a segment of aluminum window screen and shaped it to match the missing part of the wheel arch:
I then globbed the fiberglass resin onto sheets of non-stick aluminum foil and stuck them to the screen for the main panel part (not the lip) and let them dry, then removed the foil and applied the resin for the lip directly to the screen with a putty knife. At first, it surface was every irregular:
but I repeatedly sanded it down and added more resin as needed until the pits were pretty-well filled and the shape was right. I ended up applying the rust converter again after the final sanding, since I'd exposed bare metal and got a heavy rain before I could finish the work.
When I went to put on the primer (Napa's store brand), I found some remaining pits that were going to look ugly. I tried several unsuccessful ideas for filling them before settling on just spraying the primer on really heavy then sanding it down, which worked our reasonably well:
For paint and clearcoat, I used Duplicolor, which matched the original factory color almost perfectly, even with 20 years of wear on it. Here's the final result:
I'm going to wait for the paint to fully harden before I reattach the rubber piece that goes on the lip. That should make it look even better, and protect it. Now I just need to re-paint the adjacent scratched-up panels.
Overall I was really happy with the resin product I used. It's very strong (hard to sand, actually) but not extremely rigid, so hopefully I don't have to worry about it breaking if somebody bumps my car in a parking lot, etc.