Steve,
I'm not sure your logic holds up here. Is it really "proof" that your father knows he is being cruel that he is not cruel to people he admires and/or fears? Are you cruel to people you admire and/or fear? In the first instance, you wouldn't want to be cruel; in the second, you'd be afraid of the consequences. So I'm not sure what it proves that your father refrains from behavior that there are strong self-preservationist reasons for not engaging in.
That said, I think it's probably true that on some level your father knows what he's doing to you. What he may not know--because the limitations of his personality prevent him from knowing it--is the effect he's having on you. From my own experience, I can say that narcissists simply don't register other people's pain. They do not empathize. I think it's because the desire to preserve and feed their self-image trumps all other emotions, including love and empathy. They're doing what they need to do to maintain their place in the world. At any cost.
Should you feel pity for your father? Only you can answer that question. Obviously, your father is missing out on a lot of positive emotional experiences. My personal conclusion is that we are all prisoners of our personalities, but some of us are strong enough to carve a door in the cellblock wall. Your father may not even perceive the need for a door.
If you are moved to pity your father's inadequecies, then by all means let yourself feel it. It means you are a better, bigger person than he will ever be. I wouldn't spend a moment trying to wipe that emotion out of my mind or heart. But your pity does not give him the right to manipulate you. He may see your emotional depth as weakness and try to exploit it. Your job, I think, is to keep him from doing that without hardening your heart and cutting yourself off from a valuable part of your emotional life. You can be sad for him without caving in to him. That's a tough course, but I think an honorable one.
best,
daylily