We have a main site (CountryWebsite.com)
Also have mini sites for cities
like
City1Website.com
City2Website.com

etc

Is it good for SEO to display City1.CountrySite.com OR www.CountrySite.com/City1/index.htm as www.City1Website.com with the help of url rewriting

Here's a run-on sentence. No time to clean up today. Gotta' paint!

Personally, I'd go with the City1.CountrySite.com sub-directory version as it would cause for the entire domain to have deeper, richer depth making it easier to naturally empower it all in the SERPs (with the help of a well-structured navigational system of anchor links to the important webpages and with the inclusion of a comprehensive site map).

Google Count subdomain as a new Domain, so you wont get a link juice of your existing domain, so its better to build a directory and go for that!

For SEO purposes, it's probably better to have a sub-domain

The more keywords in the URL - higher ranking you get and more difficult to type it in browser. Choose what you want :)