Yes, I know this is something obvious that everyone likely knows by now. I just wanted to post my thoughts on it, and an alternative that I had in mind.
The main factor which I believe harms PS when it comes to good looks is the current skybox system. Everyone who tilts their camera up can notice the sky is just an inside-out sphere, which is most visible when you walk too close to the edge of an area. In many cases, it also overlaps with neighboring skyboxes in ugly ways (I took a few screenshots of it here
http://img442.imageshack.us/img442/583/buggyskybox.jpg ). Now again, I know this is likely temporary and I'm not complaining or anything. Just wanted to post some of my thoughts for a good alternative.
Even if the overlapping would be fixed, I don't believe a sphere stretched over the whole area will ever do. If you look up while walking and moving the camera, you see the skybox is right above you and very close, braking the illusion of a far away sky. I also don't believe a correct day-night cycle can exist with the sky using a single texture at different brightness levels (you need stars during the night, a blue sky with white clouds during the day and so on). So on the technical side, the way I understand the engine (not a developer though I wish I was), this is my suggestion:
I'd go with completely removing the fake sphere models, so if someone looks up they see the infinite 3D space. Currently, if you look into infinity (happens in buggy situations) you only see models leaving trails over the black space. So my idea was rendering a cubemap skybox over that infinity, and letting players see it (most realistic skyboxes are done this way afaik). The cubemap itself would always be full bright and not affected by lightning, so lightning can be decided from the texture only. By making the infinite space display the sky as a cubemap, it would also look realistic when you move around. A cubemap makes the sky move with you, so you see it as far away as possible without it looking fake. If placed over a model like it is now, even if the model is large, it's obvious the sky is close and fake when you compare its movement to objects around you.
As for a the sky reflecting the time of day, I'd use multi-texturing with a fading effect for that. So for example, we could have a blue sunny sky cubemap for daytime, a red sky for sunrise / sunset, and a black starry sky for nighttime. At 12PM, the skybox only diffuses the daytime image. As the clock advances to 6PM, the red sky texture fades over the blue one, until at 6PM it replaces it completely. Then from 6PM to 12AM the red sky texture starts doing that with the black sky texture and so on. This can probably be synced with the ambient lightning system, to assure they both work properly. There could be some better alternatives here... like having the clouds as a separate layer that move across the stars / sun. But imo that's less important for the time being.
I know I'm probably pointing the obvious. Just posted this with the hope of inspiring the devs and making this happen sooner... if implementing an envmap system isn't too hard. I'd love to see a wonderful high-res sky when looking up, which I believe would make the environment much more beautiful and have a great impact
Here's something I quickly photoshopped with a random sky image, to get a little taste of if:
http://img824.imageshack.us/img824/183/shot143.jpg