Of course it would require the game engine to provide context to the LLM, it certainly is quite a bit of work but nothing technically impossible and the result are endless possibilities and endless replayabilities. You could very well let the LLM decide if an npc should agree to give an object to the player or not, even let the player try to convince the npc.

I mean it looks like to me the next big step in gaming after 3D and yet this is being ignored.