Unless you can have a smart AI that can recognize the semantics of sentences well enough to match the quest, menus are the better option.
Nothing can be more frustrating that trying to get an NPC to talk to you when you get a word or two wrong. In EQ they use brackets to highlight words you can use to ask about the quest, but it\'s not conveiniet.
A better method to do is to use smart and dynamic menus.
For example, you might go to an NPC, and he\'ll only talk about a quest when you meet some criteria (level, race, skill, alignment, item you have in your inventory..etc).
Imagine the following:
Fextina: Hello!
Boortak: Oh Thor son of Odin, what have I done to deserve this?
(NPC then performs some crying animation, then looks at Fextina)
Boortak: What do you want stranger? You better leave me alone!
[1] What\'s wrong, Boortak?
[2] Okay, I\'ll leave you along, bye!
Then the quest/story goes on. I don\'t think menus will take out any of the role playing experience. If they\'re done in a smart and dynamic manner, they can in fact enhance the experience.
My two cents.