I beat Bayonetta on Normal, and thus far, i'd have to agree with the OP in regards to it being the best action game ever made. I'd also give GOW3 about a 5% chance of topping it (being generous).
What I disagree with is that the characters, story, and Mythology are bad, and that combat is the only thing that makes it better (it doesn't).
What also makes Bayonetta the best action game ever, is on top of having a brilliantly fluid, and deep combat system, with enemy AI that is a marked improvement over DMC, it also that it is just purely insane. Take every impressive point in God of War (boss fights, QTE's, presentation), and Bayonetta absolutely destroys it in every regard, many times over. Plus, the story is done by the creaters of resident evil/Okami. Its puposefully cheesy (in a very good way), but also relatively deep (in myth), and very intriguing. Though the dialouge isn't that great, and it is too vague. But Bayonetta is a fantastic character, probably the strongest and best female lead I've seen in a game ( I certainly haven't played every game though ;)).
On top of this, the level design is excellent, and pretty nuts as well. A bit of a spolier, but Bayonetta can also walk, and fight on walls/spheres, at any angle. Imagine being chased through the narrow streets of an italian-like paradise city, by rolling balls of fire, which were triggered by an angry god trying to eradicate you in any way possible. Lava is spewing through the floors, and you must run through the streets, along the sides of buildings, up the face of buildings, which fall over mid-run and you must recover from. Meanwhile you run into bigger and bigger enemies, finally running into an absolutely massive, agry god, who is a giant upside-down baby face, with two huge dragon heads coming out at the tops, and large wings. All this time, Bayonetta never feels overly linear, and always remembers to include good exploration, and many secrets. Now imagine that this stuff happens constantly, consistently, and increasingly better throughout 17 levels, and feels to have a mster-class feel in dynamics, with lulls and climax's, peaks and valley's incredibly well pace throughout the entire time, without any backtracking, and through incredibly varied and often breathtaking environments. Also, the graphics engine is very impressive.
In my opinion, God of War was impressive for its presentation, and accesability. Its combat was great, if you'd never played another action game. Its story was great..for an action game. But the polish of it all, and the over-the-top cinematic style is what made it so impressive. Its combat system was always mediocre in comparison. Lacking in strategy, depth of combos, it had overly simple, cheap enemies, but it did have some impressive and fun bosses (though they were few). It was also really short, and way too linear with very little in the way of exploration.
Also, Kratos is a great character, but GOW's story was not great. It was Epic, but also a shallow depiction of Characters (Greek Gods), taken from far more impressive literature. Kratos was always a one-dimentsional character as well (I'm angry...but thats about it). But the way the story was presented is awesome. More of a good popcorn flick than a good story.
The reason God of War is copied so much, is because it was the most popular...and it was the easiest to copy. God of War 3 would have to be a radical departure from its predacessors to compete with Bayonetta, and looking at its predacessors, and screens/video, I don't have much hope that's happening. Although I'm sure it will still be quite good, and technically look great, if not amazing.
Having said all this, Ninja Gaiden 2 still has a deeper combat system than Bayonetta, and far superior AI. But its lack of polish and cheapness is what kills it. Bayonetta is just a much smoother ride. Its an over 12 hour solid campaign, with tons of amazing and fun to fight enemies, and bosses, and has a ton of replayability and unlockables. Its an amazing game.
Next Gen 
