I think that at least some portion of the ambiguity was probably intentional. Coppola at this time was also involved with The Conversation, which he acknowledged was influenced by Antonioni's "Blowup." These are films steeped in intentional ambiguity.

I've thought for a while that what we really know for sure about the Michael-Fredo-Roth story is contained in just a few scenes (the "you lied to me," "Johnny Ola brought me here, and "I'm smaht," scenes) that border on parody. If you lift them out, pretty much any interpretation of GF2 would be possible, including that Michael had set up a phony hit attempt as a pretext for getting rid of enemies that existed only in his own mind.