Oh, if I were a betting man, I'd say that's probably the likely scenario. Giuliani is a seasoned enough politician to chew up a movice like Obama, and Hillary's negatives are so high that she's going to have to fight for every 1% Undecided over and above the 35-40% Democrat Base.
However, as you correctly observe: any Giuliani/Democrat matchup is just a race between two Liberals (quite literally -- Rudy sought and received the endorsement of the Liberal Party of New York). Ergo, as long as we have the opportunity in the Primaries, I'll be working to nominate Anybody But Rudy -- most preferably Ron Paul.
You’re forgetting the war. Everybody seems to be. Rudy is as much a backer of the failing surge as McCain. If it continues to go south, amd Rudy refuses to back down, the Democrat will benefit. This applies to any pro-surge candidate.