As a developer, I would certainly prefer the fog rather than the blur. The fog is much easier to implement, and is going to require less processing and work on older video cards more reliably.
Also, with blurring, the distinction between levels is hard to notice, and it very quickly gets very hard to notice the deeper you go (at some point, it all looks more or less equally blurry), unless you really crank the blur level up significantly for each z-level change. But doing so also increases the performance cost significantly, if I'm thinking correctly.
With fog, it is easier to see each z-level change, and until you've reached the level where the fog causes a complete lack of visibility, the visual change between each z-level is pretty consistent regardless of depth. And regarding concerns about how it looks, and how it might interfere with in-game elements such as water, smoke, or miasma, I think a careful selection of colors and translucencies can largely remedy that problem. For example, water could be clearly blue, and moderately translucent. Miasma could be clearly purple, and moderately to highly translucent. Smoke could be gray and only somewhat translucent. And the depth fog could fit in by being gray (maybe with a bit of blue) and highly translucent. Since it isn't strongly blue, nor is it's opacity as high as water's opacity, it wouldn't be easily mistaken for water. Nor would it be mistaken for smoke for similar reasons. And miasma would just look quite different from them all by being purple.
[Wrote this before chucks; those suggestions for distinguishing among gas/liquid/fog types sounds potentially better than mine, though the idea remains the same.]