It doesn't much matter to me if it's one single sentence or three. Video game dialogue is rarely well-written and almost never reflects my characters. I have a really hard time playing any of Bioware's games, for instance, because the dialogue Bioware's writers provide for my characters almost never fits my characters in any way. Too often I end up picking one of their lines of dialogue at random, and feeling like I want to put a hand over my eyes so I don't have to read it. I feel the same way about most of the dialogue Obsidian writes.

I like having topics, but when a character asks the PC a direct question, having written responses to convey choices is nice.

Which, I think, is how Oblivion did it?

Pretty much. You'd have general topics for conversation, while questions or statements requiring a direct answer would give you a couple short dialog choices.

There's also http://skyrim.nexusmods.com/mods/14513 which highlights another issue with dialog choices. Different races have different ways of talking, and may even have a different perspective on different topics (like demonstrated http://static.skyrim.nexusmods.com/mods/images/14513-5-1354570944.jpg or http://static.skyrim.nexusmods.com/mods/images/14513-3-1348039358.jpg, so why do all races have the same dialog choices for the player? There's also cultural biases (a Khajiit born and raised in Hammerfell may not have the same style of speech as one native to Elsweyr), which can change how a character would talk. Given all these issues, topics just work better for role-playing.

I have the "Khajiit speak " mod, and I considered using it for my Dunmer who has lived most of his life in Elsweyr and talks a bit like the Khajiit. In the end I didn't, because he would never say "Khajiit thinks", "Khajiit wonders" etc. Obviously, as he isn't Khajiit.

Topics when modding, written dialogue when playing.

Both.

I like topics for providing multitudes of info for your character.

But if there's actual character interaction I prefer written dialogue. One of my big peeves in games is when you choose a dialogue choice that isn't clear, and your character acts in a way completely contrary to what you meant by it.

I would prefer topics. I like to voice my own characters and say the options out loud before selecting them, and having the options laid out for you kinda ruins the immersion a little.