Bouncing about reading posts, I believe it was Unsub who had a list of 10 types of quests and how every quest is a variation or combination of those 10 types. Their repetition becomes rather transparant after a short time and as such affect immersion negatively. As do things like hte "humanoid kiosk" quest givers, or receiving quests that are ill suited to the nature of your character.
One idea that struck me was that last point... beinging to mind the apparent loss of the PnP RPG concept of alignment. Outside of Fable, and reputation with factions or unlocking things via quest chains there doens't seem to be much impact your behaviour has on what you can do in game. Much like the branching quests that Unsub was discussing, this would reinforce an illusion of affecting the world around you. If certain choices push you more one way or the other on two scales it would affect how you progress and what quests you are offered.
If all characters start out True Neutral they can then go out and take on quests, occationally a "curve ball" or AI element will pop up. Say some of hte bandits you attack run for it, and you chase one of them down. If randomly some of them turn to fight, others may have ran for a farm house and taken a hostage, and others may throw down their weapons asking for mercy... play action from there push you in different directions.
Some actions may only be on the topic of good/evil while others may be lawful/chaotic, and many could give points to both scales. Killing the surrendering bandit may add to lawful and to evil at the same time, killing the hostage taker or the bandit who stopped and fought back adds lawful and good. The choice made will depend on what the AI in the mob shifted to. Meaning, these random AI events could have all sorts of things they could turn into rather than just another brigand. Some may try to bribe you, or offer you other information... and you may even get to take the information then kill him anyway to become more Chaotic Evil for betraying them.
Such a set up could occur on a number of levels, low grade brigends, or be a rare outcome to some boss fights against officers of factions.
This may not be on the same plane as players being able to destroy whole cities, personaly destruction of major cities I think is best reserved for speacial in-world events or as an opt in PVP element for players who want to get involved in war games. However, having alignment affect which quests pop up for you... if things like word of your actions is implied through text as having gotten back to townsfolk it may change their reaction around you. I don't think this would make sense until you've gotten into the more extreme levels of the alignment. You get to a certain level of lawfulness and the guards in cities are more polite to you, options to do more military associated quests come in. Getting to a known level of good means common folk are more apt to chat you up... jovial types may even offer you free things now and then (especially if you also have high rating with their faction). If you've gone evil the townsfolk may shy from you in streets, some may whisper about you and only the dregs of their community will offer you quests... or others with high evil ratings like evil guard captains or sneaky polticians.
No it isn't being able to destroy the town's annoying bell tower permentantly... but it does mean the world "changes" around you based off your actions. Putting more emphasis on the social elements of your role in the game world.