1 - You CAN airbrush model color. Don't pay attention to the "larger pigment" stuff. It airbrushes fine, even through a .3mm needle that has shown fickleness with airbrush-ready metalizers. Honestly, since I'm more used to its behavior, I find that Model Color airbrushes BETTER than Model Air, since Model Air is all about the tip dry.
2 - DO NOT used distilled water to thin for airbrushing. Don't thin enough, and it'll clog the brush. Thin too much, and you'll be having runniness issues all over the place.
3 - You need a thinning medium that's not as watery. I know some people have had great luck with Liquitex Airbrush Medium. I personally use Future at a 1:1 ratio and find that it lays down a smooth, semi-gloss, durable surface. I overheard at the LHS a few weeks back someone saying that they've found Testors acrylic thinner to work well, but I haven't tried or experimented with this in any way.
4 - Vallejo paints won't reduce to ridiculous levels the way Tamiya paints will. Drop below a ratio fo 30% or so paint, and it starts to show, at least in every way I've ever tried.