I don't think it needs to be as complicated as you make it out to be. AI in games only needs to give the illusion of intelligence to a point where it is easy for the player to suspend their disbelief. At that point you get immersion, and the player "feels" like the NPCs around him have personality, story, etc...
This is hard in any game, but I think especially hard in MMOs. It would take a tremendous amount of effort, and the payout (in terms of game play) wouldn't be what most players would value.
I'd rather MMOs give in-game incentive to players to take on the traditional role of NPCs in as many ways as possible. If real players perform the functions of the traditional NPCs you don't need to have any special script making the NPCs "behave as humans do."
Despite its many flaws, this was one of the reasons why I loved SWG at launch. If you went to a tavern there were PC entertainers there. If you went to a medical station there were PC doctors there. If you wanted to buy something you had to go to a PC merchant (for the most part). People were forced (happily) into playing in valuable roles in the city. This made the cities seem alive, dynamic, and were just fun to "hang out" in.
(It also made the game painfully dull when player subs dropped and the cities turned into ghost towns.)
This "hang out" factor is something that I would love to see in any new MMO. You have an in-game reason to just socialize and enjoy your time with other players. It feels natural, and is extremely immersive. In other words, you don't just hangout at the cantina because you want to socialize...but because that is the place where you can heal up, find a group, sell an item, etc...the socialization comes naturally b/c the game design pushes you into a social interaction.
EQ succeeds in this by designing most important quests and encounters to be group oriented. Compared to most modern MMOs today there is precious little you can efficiently solo in EQ. The game wants you to make friends, build allegiances, help others out, and have you ask others for help to get most worth while goals accomplished. Its something I took for granted while actually playing in classic EQ, but it is not so present to the same degree in today's mmos.
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