I haven't seen it done in an MMO myself (I know some do, I just haven't seen it myself), but Xenosaga III does this to absolutely amazing effect. It really streamlined the quest system and opened up a lot of interesting possibilities. You could actually organically "overhear" a conversation, rather than having to awkwardly walk up and talk to total strangers for your quests. If done tastefully, I think it could be even more useful in an MMO.

The landmines you would have to watch out for is taking one step forward and two back by making NPCs say the same things over and over again, which would take away from things, rather than adding to them. I don't know if it would be a good fit for FFXIV necessarily, but I don't think it's something that should be discarded out of hand.