IMO a (mostly) abstracted conversation system would work FAR better than actual dialog. With current technology, there are limits to how realistically you can simulate dialog, and those limits are unfortunately not very impressive. Here's just an example of a few abstracted conversation pieces that would probably be quite hard to simulate as actual dialog:
1) CraftsDwarf and FarmerDwarf discuss the intricacies of making toy anvils. CraftsDwarf appears to be knowledgeable on the topic, while FarmersDwarf appears to not understand most of what CraftsDwarf is saying. CraftsDwarf appears to be immersed in the conversation, with a hint of smugness. FarmersDwarf appears to be uninterested in the conversation, and is trying to discreetly steer to a new topic.
2) HeroDwarf makes a snarky comment about BanditA's face. HeroDwarf makes a masterful delivery of the joke. HeroDwarf appears to be calm. BanditA appears to be fuming with rage. BanditB is rolling on the ground, laughing.
3) WarriorDwarf is delivering a passionate speech about defeating the elfs to the group of soldiers. WarriorDwarf mentions the power of friendship and religion, and denounces the evil elves. The speech is delivered passionately, but WarriorDwarf stutters throughout. The group of soldiers appears to be listening intently to the speech. The group of soldiers appears to be disheartened. Some of the soldiers are quietly laughing.
4) ConDwarf is claiming to KingDwarf that he is his long-lost son HeirDwarf. ConDwarf recounts a fake story of how he has disappeared and his life up to this point. ConDwarf's story is exceptionally believable. ConDwarf appears to be passionate and excited. KingDwarf appears to be totally buying ConDwarf's story, with a hint of being of excited. KingDwarf is barely holding back tears. The king's bodyguards are listening intently. The king's bodyguards appear skeptical of ConDwarf's story. Some of the bodyguards are grimacing at ConDwarf.
If you ask me, I'd be fine with the above examples being abstracted like this in the game, because how could the game realistically simulate:
1) A discussion on the intricacies of a random, technical topic?
2) A masterfully delivered joke about some guy's face?
3) A poorly delivered speech?
4) A long-winded, made-up but believable story by a conman?
These are just some of many examples of conversations that couldn't realistically be well-simulated in the game as dialogs. Some more simple statements and questions(e.g. "What's the price of dwarven beer here?") could be displayed as actual dialog, sure, but I'd rather have an abstracted, but complex and believable conversation system, rather than a concrete but poor paraphrased dialog system.
Remember, the less time Toady has to spend implementing a bunch of pre-scripted conversation templates that would get old and repetitive quickly anyway, the more time he can invest in making conversations more diverse, detailed and believable.