I like the gravel idea. Use chipped pea gravel. Rounded pea gravel will flow away like water. Chipped pea gravel will lock in place.

Many building codes require the down spout to drain a certain number of feet away from the building foundation. That would probably work for you, too.

Another option if your desired landscape conception will allow it would be to use medium to large river slicks or river rocks and create sort of a natural looking water runoff/stream. This should slow the velocitty of the water to assist in stopping the amount of erosion.

I will def. be researching how to put in a drain off the gutter, as getting water away from the house is a must, I have another spot where I will be doing the same thing.

As far as the rocks I will see what I can find and pick something that wont look to out of place. The goal would be to grow grass all around the rocks, although it seems to die every winter and slowly come back as weeds/grass in the summer yet never enough to cover the slope, but I will try seeding it this fall.

Also, would the rocks need to be put on any base? Or just pack the dirt?