So I'm really conflicted about this. How did you guys do this quest? Walked into their camp, talked to the leader, tried to reason with her. Ended taking out the whole camp with some hand to hand combat :P Not my proudest moment. ( Would have done the same if it were humans attacking elven caravans though). How did you guys resolve this quest?

I have a weak spot for the elves in the Witcher universe. Sure, they do horrible things too, but they are universally hated and treated like dirt, so it's not like they have much of a choice.

Therefore I let them go and lied to the guard. This gives only XP as a reward, but at least no one else has to die that day.

Letting them go would be closest to book geralt. Rereading Blood of Elves and
Just read the part about the caravan ambush. Prior to it, Geralt said not to count
on his sword if the elves attacked. But when they did, and his friends were in
danger, he did his part.