in far cry 2, you could set fires and it would spread in real time enabling you to shoot a lantern and watch a whole encampment burn down.

http://www.youtube.com/watch?v=GwpSCH-cRjY

from what I gather skyrim will also have real time fire (oil, dragons, burning the town mill)

so does this mean a dragon can burn down a town and that town will be no more?

or even the player can start burning stuff? ie dont like an NPC? burn down their house and they are no more?

will burned buildings be rebuilt over time?

I doubt they'd enable buildings to be able to be burnt down, let alone entire cities.
But hopefully fires can spread like they do in FarCry 2, based on foliage, temperature, the environment and all that.

this new engine seems like it can accomplish a lot of things environmentally, so i wouldnt put it past them

Fire magic is confirmed to start little fires, hopefully they'll be able to spread. Given that Skyrim is often a very cold place, covered in snow, though, and fires spreading throughout entire cities could be hard.

I very much doubt it.

Without any dev confirmation, I can safely say that buildings with interiors won't be able to be burned down, therefore cities won't be able to be burned down.