That's tough. If the mare was very ill, I think he did the correct and humane thing to do. Making the mare suffer a prolonged life of illness is very cruel in my eyes. As far as the other horse's reaction, I doubt they fully understood the gravity of it. They don't have a concept of death, so the situation isn't as overbearing to them as it is to us. They probably spooked most over the sudden noise and the farmer's behavior/emotions. I would think that in some way, the farmer did care. He went to end her pain.
Will the horses trust a human again? Yes, I think so. I don't believe horses can make the correlation of gun = sound = dead horse. I'd be more prone to believe a horse would be weary of a gun due to the sudden scary noise, but even then I wouldn't be sure. I don't even know if a horse would make the connection to the gun making the noise. After all, the gun didn't move or project any body language. Instead, it was held still. If the gun were fired multiple times, yes, I think the horses would understand the gun is the cause of the noise, but even then, they may become desensitized to the noise and not care.