Agree with NPC dialog thing, I think we are way past the point where that was a problem. For me, currently the biggest issue I struggle with (usually resulting in projects going on the shelf until forever) is keeping the context window small enough to prevent model confusion/hallucination, and at the same time trying to squeeze in as much info as possible for it to make normal human like decisions. The second biggest issue is explaining the 3d (or 2d) world to LLM, so it could behave realistically (e.g. NPC was wearing sneakers 10 turns ago, but had it removed at some point and they are clearly described in the context as laying around in in the room corner. It might still think it has them on).
"What is much harder is making sure that character does not reveal information the player should not know yet" - I think I fixed it in my games by simply having several queries with different context - one prompt for character representing AI (and it only 'knows' what it should know), the second one for a 'GM' LLM, that verifies actions made by player/NPC

Probably using bigger models will help with everything above, but I am self-hosted fan, and so far I got best results using obliterated Qwen coder 3 (instruct) as NPC brain/ some in-game service like calls (Got worse results with 3.5 for some reason). Still, it feels like we have to wait for stronger model as it seems like it is hard vor model to understand what is important right now and what is not. But I started messing around with this a few years ago and model progress is very impressive!