Besides the fact that Senator McCain is one of my favorite politicians, he is very useful to the Republican party. In 1996, the Republicans should have won the White House, given everything that happened in 1995. The reason they didn't was because they were successfully painted by Bill Clinton and mainstream liberals as partisan extremists. I love Bob Dole, but the American public could not see him as the face of the country; they merely saw him as the Republican Senate Majority Leader, a face for the party. Bush won in 2000 because he came off as a compassionate conservative. I believe has has, just or unjustly, lost that label in the eyes of the public. The Republican party needs to come off as more progressive, more fiscally conservative, more libertarian on the social issues. Senator McCain is popular with Republican voters (as was seen clearly in 2000) AND with Democratic voters. A man like him, who could seize the Independent vote easily, is a very strong asset to the Republican party. Sure, he may not be the poster boy for Conservatives, but he can help to expand the Republican base. Also, might I remind you, President Bush is not exactly a classic Republican himself. He spends like a maniac, and has overseen an expansion of federal government. Don't get me wrong, I'm voting for the guy, and I think he's been a good President, but every politician has their flaws and those are his.
For every vote Senator McCain brings in from the left, he drives one away on the right.
"The Republican party needs to come off as more progressive, more fiscally conservative, more libertarian on the social issues"
When you betray your principals for the sake of popularity, you are essentially selling your soul. You must be aware of what your principals are and act upon them, otherwise you lack the moral clarity to lead.
So it's interesting that you also say the GOP should be "more progressive", and "more libertarian on the social issues". You are suggesting that the GOP should become a fiscally conservative version of the current Democrat party. Given Schwarzenegger, Guiliani, and Blumberg, for example, this appears to already be happening.
It might succeed in pushing the current Democrat party off the map, but true conservatives will simply form another party, becoming as large as the today's GOP, as the conservative alternative to your "new GOP".
A political party can try to represent all positions on opposite sides of every issue in an effort to "include everyone", but it would lack principle. It would be a house divided against itself.