Indeed, it's possible to create huge game worlds using procedural generation. For the sci-fi fans, there's
Frontier and its buggy sequel
First Encounters, which came out around the same time in the early-mid nineties as Arena and Daggerfall, in which the game can procedurally generate the
entire galaxy, hundreds of millions of planetary systems with stars, planets, moons, asteroidal bodies and etc, all in the space of one old-time floppy disk-- less than a megabyte. All the computer needs is the math for generating the systems and they'll turn out the same each and every time because the numbers don't change. Known systems like Sol, Alpha Centauri, and so on are hand-coded, just like the capital cities and main quest dungeons in Daggerfall and Arena. Physics and light-sourcing are also reasonably handled, at least given the time the games were released.
Frontier is similar in many ways, tone-wise, to Daggerfall-- totally free form universe where you get to take whatever role you want in the game. And like the Elder Scrolls, it's still got a loyal fan base online.
Of course, there's also some difference in using a five-megawatt pulse laser as opposed to a fireball spell.
While I agree with mingoran that creating a landmass the size of Daggerfall's play area would be prohibitively difficult without procedural generation, I also think the method has a problem with
sameness, a sort of bland uniformity of everywhere. Aside from the main quest dungeons and capitals, Daggerfall has no famous landmarks to seek out. Every town is pretty much the same as any other, aside from the building textures and NPC names. The best way, for my money, would be a more balanced combination of the two methods. Procedural generation for wilderness and many towns, but hand-code a little more variety in. Give the players some nice out-of-the-way locales to wander. I think the later Elder Scrolls games, from what I've seen (and I'll admit I've only played Arena and Daggerfall) have at least some of that, though perhaps they took it too far and limited the scale of the game.