I'd have to say your example is a little dark for my tastes, but I do love the ideas you present in principle. Finding a 'least worst' option can be far more intriguing - and thus interesting - than 'do I kill the evil orcs to save the good elves'.
'Do you replace the evil king with the evil duke or help the evil king destroy the evil duke?' is something where you are really stuck with your choice, as the kingdom needs a king (Unless you can persuade someone else to be king, of course <img src="/ubbthreads/images/graemlins/smile.gif" alt="" />). 'Do you help one bunch of evil marauders destroy another bunch of evil marauders' should allow us to wipe both.
A set of complex moral choices with many shades of grey and no hints sounds like a great game to me, I must admit <img src="/ubbthreads/images/graemlins/smile.gif" alt="" /> I would certainly get something like that.
As for Karma... No. I think the best thing would be to go by a sort of trust system. Whether others trust you or not should depend on whether you keep your word or not. A known liar & backstabber should have a much harder time convincing people of his good intentions than someone who is known to keep his word. This also allows for a darker world as people will not look at you as 'good' or 'evil' but 'trustworthy' or 'untrustworthy'. And word is bound to spread... <img src="/ubbthreads/images/graemlins/smile.gif" alt="" /> Obviously this would have an effect on how much people would tell you without bribing or intimidation, and whether or not they will hire you...
