I think it may also cause certain fortresses to rebel against their metropolis - similar to the groups of catholic heresy rebelling against the Pope.
However, something you've said has concerned me. Heavenly bodies such as the moon and the sun - if they were ruled by deities - would be points of ultimate cosmic power. Everyone see's the sun, and everyone has cause to worship it, leading the sun deity to gain ultimate power and influence. In reality, the importance of sun deities such as Ra to the Egyptians differs greatly to the importance of Helios to the Greeks & Romans.
How would deities of ultimate power be managed? Things such as 'Sky', 'Stars', 'Sun', 'Moon' and so forth.
One possibility maybe the worship of this deity under separate names and identities, such as how the Romans adopted the Greek pantheon under differing names.
Interesting that heresies that already in the game for humans. From time to time a new religion is formed that worships the exact same religion as the old one resulting from (or causing) the immediate destruction of the old temple by the government and the building of a new temple controlled by the new 'heresy'.
The basic idea you are using is how the elves religion works. They do have a spirit that is completely confined to a particular region and represents that region.
But the basic religious system is completely historically accurate for the pre-Christian world. Each nation in the pre-Christian world had it's own traditional gods (including the jews, but they only had one and are generally a special case) and what god's you worshipped was a statement of nationalism as much as an assertion of a universalisable belief in the nature of reality.
As far as the theology is concerned, gods were often identified with eachother. So we have the Roman Venus and the Greek Aphrodite for instance. There is no fundermental problem with the present system, it is quite likely that 'theologically' speaking all gods that have the same basic spheres are actually the same gods in different culture.
Gods probably should not act independantly, instead we should focus upon the role of various clerical groups devoted to different gods. The best way to do this is to actually represent the development of Monotheism from within the existing system. We start off as we do at the moment with a group of gods that represent particular spheres. Certain spheres are empty (not-used) which means implicity that the civilization is unhappy with the concepts represented by them.
If two gods exist in two nearby civilizations that share the same spheres then they can become identified. The more identifications that there are the less chance there is of conflict. Conversely however, if there is a god in one culture that has a sphere that is not found in the other culture, if relations are bad then it may be adopted as a 'devil' in relationship to one of their own gods. The more devils a civilization has that are gods in the other civilization, the greater the chances of conflict.
If relations are good then the foreign god may be adopted as a member of the pantheon instead of being demonised. The actual mechanic for how Monotheism would arise would be as follows. Instead of the present meaningless system of schisms, instead the dominant religion numerically develops a supremacist strand which considers their own god to be the chief god in the pantheon, rather than an equal. If the heresy succeeds (which at the moment it always does) then those religions that are not massively outnumbered themselves undergo a schism between those who accept the new god's supremacy and those who don't.
Should the supremacists be victorious then that god is adopted by the civilization as supreme deity. This magnifies the power of both it's identifications and it's demonisations. Once the concept of a supreme deity is established, we can get a Monotheist strand that functions in a similar manner, except that it must actually destroy all existing deities. If it wins then all gods are bundled together into a single god that bears the identity of the original god but all the spheres, identifications and demonisations of all the gods.