Label to Route mapping, Label generation scalability

The difference between aggregate labels and normal labels is such that normal labels directly point to L2 rewrite details (an interface and L2 address). This means a normal label will be label switched by the egress PE node directly out, without doing an IP lookup.

Adversely, aggregate labels can potentially represent many different egress options, so L2 rewrite information is not associated with the label itself. This means that an egress PE node must perform an IP lookup for the packet, to determine appropriate L2 rewrite information.

Typical reasons why you might have an aggregate label instead of normal label are:

1. Need to perform neighbor discovery (IPv4 ARP, IPv6 ND)
2. Need to perform ACL lookup (egress ACL in customer interface)
3. Running whole VRF under single label (table-label)

Some of these restrictions (particularly 2) are not valid to all platforms.

How traceroute is affected in MPLS VPN environment is by the transit P, when generating the TTL exceeded message, will not know how to return it (it does not have routing table entry to the sender). So a transit P node will send the TTL exceeded message with original label stack all the way to the egress PE node, in hope that the egress PE note has an idea of how to return the TTL exceeded message to the sender.
This feature is automatically on in Cisco IOS but needs 'icmp-tunneling' configured in Juniper JunOS.

Based on this, I would suspect that perhaps your CE devices are not accepting packets when source address is a P node link network, and as they are not accepting the ICMP message, they are not able to return it to the sender.
A Possible way test to this theory would be to enable per-vrf label:

• IOS: mpls label mode all-vrfs protocol bgp-vpnv4 per-vrf
• JunOS: set routing-instances FOO vrf-table-label

Generally speaking I do not recommend propagating TTL, especially on VPN environment, at least in our case customers get confused and anxious about it. They worry why their VPN has foreign addresses showing.

Another thing which confuses people causing them to open a support ticket, is when they are running a traceroute from say the UK to the US, because they see >100ms latency between two core routers in UK, not realizing that the whole path has same latency all the way to the west coast of the US, because all the packets take a detour from there.

This issue is mostly unfixable by design, however in IOS you can determine how many labels at most to pop (mpls ip ttl-expiration pop N) when you are generating TTL exceeded. This gives you a somewhat decent approximation if INET == 1 label, VPN == >1 label, so you can configure it so that VPN traffic is tunnelled and INET traffic gets directly returned without egress PE node detour. But as I said, this is just an approximation of desired functionality, as features like in-transit repairs may cause your label stack not to be always same size for the same service.

Yes both LSR[12] could advertise given FEC, say 10.0.0.1/32 with label 10 to each other.

Then if IGP says to LSR1 10.0.0.1/32 egress interface is towards LSR2, it'll impose (or swap to) label 10 and send towards LSR2. LSR2 then will find egress interface being something else than towards LSR1 and swap label to what ever that direction has advertised, might be still label 10, or might be something else, does not really matter at all.

Labels are completely local today and some RFCs dictate that is how it should be. Personally I'd like IGP labels to be global for simplicity. Because MPLS LSR does not know how labels look from anyone else's POV, we need hacks like tLDP (targeted LDP) when implementing rLFA (remote loop free alternative). We need the tLDP to learn bindings of remote node.

With regards label scope, label space today is chassis-wide in every device I've ever seen, but standards fully allow per-interface label spaces.