Some considerations when writing dialogue...

What place has this post in a blog about game design?  Well, in P&P a GM will often find themselves needing to convey some key pieces of information, to drive the plot forward, through one of the many NPCs present in the world.  So some techniques that apply to novels and film, also apply to some extent to P&P.

1) Be true to the voice of the character.

What I mean by this is don't let your character draw on information they would not be privy to.  If you penalise your players for 'speaking out of character' then the same rule is at least as important for your NPCs.  Also the character must sound convincing, i.e. if they are a peasant, and thus largely uneducated, don't let them use long words or say much on high concepts.  Your characters must sound authentic.  Sound a surgeon sounds like a surgeon and surgeonly tales to tell.

If you get this right, like all techniques, you can then start to subvert it.  Have a character that appears to be a peasant, talk like a peasant 98% of the time, but slips up occassionally, giving a hint to perceptive players/characters that they may not be all they seem.

2) Reveal something about the character.

This comes down to painting the richest picture of your NPCs as you can, as this all adds to atmosphere.  You will often find as well, that knowing your NPCs well, not only makes their voice (dialogue) more convincing, and your game detail richer and thus more fulfilling to play; but in exposing (quite often on the fly) some seemingly irrelevant element of their backstory, you sometimes can introduce a gem of an idea which you can refer to time and time again and which becomes an additional thread (or even subplot) you can weave and add into your story.  Some of the best twists I've added to my games, came about on the fly, whilst talking in character, which I then later worked into the plot (as if it the game had been designed that way - GM's prerogative I call it!).

3) Drive the plot forward.

Just like in the movies, your characters are speaking for a reason.  So they should drive the plot forward.  Where possible.  This can be acheived even when a player character is conversing with an incidental NPC because the player is barking up the wrong tree, or investigating a red herring or dead end.  When I say drive the plot forward I mean, literally that, or setting the players on the right path.  Whilst I hate rail-roading players, P&P is afterall the ur-example of sandbox games, and rail-roading should not come into it.  You do have a story to tell, and want your players to make the most of it.  Getting your players to get involved in the right story in a rich world glutted with subplots is an art in itself.