I really like that idea, the "passive" dialog can use the LLM but main dialog is a little more "on the rails". IIRC Skyrim has "background" dialog change subtly throughout the game as you progress but after 1-2 times hearing it, it feels repetitive. Using LLMs to keep that "fresh" would be interesting.

> a good priest wondering what a paladin was doing spotted talking to a notorious thief, etc.)

Love this and the other examples you gave.