"Propitiation" is the preferred choice of the two since it addresses both the context and the theology of the act. The meaning of propitiation is actually more forceful than how it is normally translated, as "appeasing." Instead, it's more in line with specifically being the object of the direct wrath of the deity in question (in the Greek mind) for transgressions. In this case, Jesus was that - he was the object of God's wrath. The result of how he assumed this wrath was the expiation of sins.
ἱλαστήριον appears in the LXX as the word for the mercy seat which also influenced Tyndale's understanding of the term. Given the thick sacrificial imagery, it's not hard to see why drew such a conclusion, which was actually a German transliteration of the word. However, contemporary Greek understanding of ἱλαστήριον does not necessarily allow for such an understanding. It is specifically related to the cycle of wrath and appeasement between the deities and humans.
I guess I am of the opinion that though propitiation and expiation are not antithetical, they are different sides of the coin.
I understand expiation to be the result and not the means of what Romans 3:25 is describing. I believe that context supports this since Paul is describing the means by which what is understood as "expiation" has been accomplished. The detailed description of the shedding of blood as the means also lends itself to an understanding of "propitiation." This would have been the most natural reading to both the Jewish and Gentile (who would have had little understanding of the "mercy seat"). Additionally, the physical object of the "mercy seat" was not an object of sacrifice, but of meeting. It was the location where YHWH revealed himself to the high priest. The detailed blood imagery would not make sense if Paul (who would have tremendous understanding of Levitical Law) is building toward this as the intended meaning.
Romans is dedicated to harmonizing the relationships in the Roman church - specifically validating both the Jewish and Gentile believers as part of the same, larger body. Much of the validation of the Gentile (to the Jew) is systematically accomplished through demonstrating the inadequacy of works of the Law of Moses for eternal salvation. However, the work accomplished on the cross by Jesus was sufficient for this outcome.
I do not find "mercy seat" to be a satisfactory, natural reading of this verb given the decidedly mixed audience, and the context of shedding of blood. "Propitiation" as being the object of divine wrath would be a concept that was more accessible to both groups and also satisfied the imagery of blood.
ἱλαστήριον does not literally mean "mercy seat." The LXX translators adopted this word from the Greek (since that was the goal of the LXX) as a means to describe the mercy seat. While this should carry some weight, it is not the deciding factor, given the above information. ἱλαστήριον literally means "propitiation" which was a concept already available within the Greek mind.