I think everyone will agree one of the greatest annoyances of Oblivion was the way which NPCs talked to one another. Everybody remembers those jewels:

Archmage Traven: I dont agree with Travens ideas on necromancy!

Kvatch Guard A: Did you hear about Kvatch being overrun by daedra?
Kvatch Guard B: No, I didn't know.

NPC 1: What news from the other provinces?
NPC 2: GET OUT OF MY FACE!
NPC 1: Interesting.

NPC 1: Have you heard, Dar-ma has been freed and safely returned home?
NPC 2: Do you think what you say is true?
NPC 1: No, not at all.

NPC 1: Hello!
NPC 2: Fine
NPC 1: Bye!

NPC 1: What's the news from the other parts of Tamriel?
NPC 2: I saw a mudcrab the other day. Disgusting little creatures.
NPC 1: Farewell

Well, the list goes on. Obviously it's impossible to record a reasonable amount of random dialogue for 100+ hours of gameplay. And it's also insanely difficult to script NPCs to actually know what they're saying. My suggestion to Bethesda:

Record lots of dialogue like this:

http://www.freesound.org/samplesViewSingle.php?id=20692

http://www.freesound.org/samplesViewSingle.php?id=9842

http://www.freesound.org/samplesViewSingle.php?id=7878

http://www.freesound.org/samplesViewSingle.php?id=17123

http://www.freesound.org/samplesViewSingle.php?id=15568

But here's the catch, record those files in Nirn's common languague, not English. This way we can imagine the player character knows what they're saying, but he's not really paying attention, which is -almost- the way we deal with street pvssyr. If subtitles are switched on, we get snippets from those words, for instance: "I heard...Yes...I think...Oh really...In Highrock, of course...I heard that too...". Etc.

You can also record dialogue in pseudo native languages, so Khajiit and Dunmer and the other races speak in their own languages among themselves. Baldur's Gate and later Gothic did this way ages ago and it worked perfectly for immersion.

Save those "Rumor" lines to the "Rumors" topic when the player interacts with them personally or quest giving topics which only happen once. This feature also has the benefit of making taverns and cities feel more alive, if you're not going to have hundreds of NPCs walking around.

Having Khajit, Dunmer, etc. speak to each other in their native languages makes a certain sense (although I don't know how practical it would be), but having overheard dialogue in general be in a language other than English would be weird, I think. If you're walking down the street and people around you are speaking English, it's not going to sound like a different language just because you aren't paying specific attention to them. Or am I misunderstanding you?

At any rate, I think the answer to the absurd conversations is not different languages, it's better NPC AI.

I get where your coming from but i think the problem will be solved in another way. In Oblivion idol pvssyr was random. NPC 1 random comment), NPC 2 random response).
With better AI we will probably see NPCs responding to another NPC's comments with topic specific statements or questions. Also idol pvssyr my be specific to NPC position in the world as well.
Example: You won't be hearing a fisherman talking about how scarce coal is and you won't hear a blacksmith talking about how difficult it is to wrangle a horker.

I hope this is the case. I'd also like for NPCs to "recognise" each other and chat accordingly; so a wife would talk to her husband about relevant stuff, while chatting to a random on the street would result in a different conversation being started.

I agree with these things.

However, I have now decided if the grab button still exists I am going to *cook* some fish using a forge. Just throwing that out there....

It was not random, it was poorly implemented. For example:

NPC: Can say a,b or c
Based on what is picked, NPC #2 can say a,b or c.
etc,etc

But some of the responses just did not work, c response to b question does not make sense.

You need a better dialogue tree, not what Fallout did and dumb it down with simple canned dialogue. ie NPC says A, NPC2 has to say b,etc

I want a really good open ended dialouge system for npcs.

It was rare but now and again esp in the imperial city merchant district(and esp with npc mods) there would be enough conversations going to organically create that kind of background crowd noise heard in those clips, it was I think of beauty when it happened. I would like to hear more of that!

That's a really nice idea.

One thing which came to mind: what about when you are right next to the conversing NPCs? Presumably you'd still get the non-English voice acting. But then the only difference between you hearing the non-English voice acting and the English voice acting, when you're standing right next to the NPCs, is bringing up the dialogue interface. I think that will be an immersion breaker for a lot of people. Similarly for subtitles: if you're standing right next to the NPCs, it's hard to rationalise why you'd always only get snippets of words and sentences.

Then again, I'm not sure if this is worse than what we had in Oblivion.

I remember a couple days ago I had one of the Three Brothers merchants speaking with an Imperial Guard for like 2 to 3 minutes and all you heard was Wes Johnson Imperial dialoge.

Merchant "Have you heard the chapel of Dibella is finished the people were slaughtered, truly shocking"

Imperial Guard "No!"

Merchant "Without question"

I agree with you that would be ideal, but making extensive dialogue trees that sound both consistent and in-character for a game that simply does not end would be a REALLY time consuming effort. Since NPCs don't really know what they're talking about, just following preset patterns, you end up with overly simplistic and artificial instances anyway. I mean, people don't go out and make observations about your muscles or talk only about the weather and ask each other every day about the same things. Perhaps a mix of both comprehensible conversations and general environment dialogue would work better.

No, you got it right. =) Maybe the pvssyr dialogue could work in english, I just find that after dozens of hours of gameplay, foreign sounding dialogue sounds less repetitive when I'm not actually understanding every word. But I see how that could be an immersion breaker. It's still a good improvement over "Hi." "Hello." "*cough." "I've heard others say the same."

Ever played Fallout 3? Ever stopped to listen NPCs talking to each other in that game?

It was great, and not boring at all. There were always something unique to listen. There was a settlement, that every night they would gather around the fire to eat and chat, and it was funny listening to the big group chat, 5-6 NPCs talking about what they are going to do the next day, how life has been and stuff.

Really immersive, and a huge step over Oblivion's mudcrab chat.

Yeah. I think the problem will be solved with the new AI.

I think it'll work out fine as well. My main hope is that this time they hire no big name stars for voice acting and spend the money on getting a horde of unknowns or lesser-knowns to give us a lot of variety.