Tempest, It sounds to me that you have answered your own question!
If you feel you are sanding to hard and going through the varnish your putting on,sand lighter!
I would have not thinned the varnish after the first coat and
maybe let the varnish harden and sink more before the next coat.
The varnish will sink more into stripped wood so your going to need more to replace it, I think your feelings are right!
If i was varishing from bare would, ie New, I would start with two pack varnish as it is harder and fills the grain in the wood better, then go to one pot for the top coat if wanted!