Doormat, I just want to make a few comments. I don't intend to try to convince you to let him have everything his way; rather, I just hope that a few things can be clarified for your benefit. (BTW, I notice this is your first post. Thank you for being willing to express your thoughts here. I hope you don't fear I or anyone else will attack you.)
DADT generally refers to zero acceptance of the dressing done by one's spouse - "keep it hidden," "don't let me see anything to do with it" - which sounds like your position. Understand, though, there are various levels beyond DADT.
One level is basic tolerance - acceptance that the spouse is going to dress as they like around the house. Another level is mild participation - this may include calling them by a femme name and otherwise referring to/interacting with them as a female. One intense level involves going out in public with "her," such as shopping outings. Another intense, but much different, level takes it into the bedroom - enough said about that. As is readily evident from various threads on this site, there are members in each of these situations.
Separately, is this something he would do, say, once a week? Or is it something that, given the chance, would last from the time he gets home from work until he leaves again the next morning?
First, let's apply those levels I mentioned to sports. Do you accept that he is going to watch, say, a Yankees baseball game, and so find something else to do with your time? Do you learn enough about his favorite teams that you can respond some when he talks about them? Or do you take/fake enough interest to actually watch games, not throughout the season, but at least when the team goes to the playoffs?
Now, let me make a huge distinction between his interest in sports and his interest in cross-dressing. The first is something he can share with plenty of other people, be it family - his dad, his brothers, his sons - or friends or even co-workers he has little else in common with. He can find many outlets readily available for interaction and support of this interest.
But, I expect, he has no one to turn to regarding dressing up. So he looks to you, hoping not just for acceptance, maybe not even for simple support, but for the chance to share and interact with one other person. More importantly, if he's like me, he is looking for affirmation for this part of himself from someone he loves, something almost no one else can provide. And why not his spouse? After all, you're the person he gets intimate with in other ways. Why, he reasons, shouldn't he safely be able to share this most private part of himself with you?
You, however, have a problem with it. As you say:
I get that this outer reality, which you must look at, in no way matches his internal self-image. But is that fundamentally any different from overweight women who wear tight clothes and see themselves as sexy? Or from men with dead-rat toupees on their heads?
He's not asking you to actually see him as a woman in reality, but to humor him in his fantasy. Trust me, if I ask my SO to play with my "boobs," I am not deluded into thinking that I actually boast D cups. But I temporarily ignore the reality for the sake of having fun via my imagination.
So, unless there is no way you are willing to accommodate his dressing at all, what you might consider is negotiating with him what limits you can tolerate. If so, include the distinct message that you are doing this for him, not for anything you want yourself. That then is a defense later against, having given him an inch, seeing him try to take a mile.