Planeswalker Maloran said:
I find the D&D alignments have worked well for most of my campaigns so far, but I can see how this could really help a lot with inter-religious conflict. Some people might not like it because it breaks the D&D sacred cow of absolute good and absolute evil, but I like it because it makes the world more realistic (and thus more believable). Believability is always the key to getting me to enjoy a game.
Also, this system doesn't seem any more complicated than the standard alignments, it just has a different set of complications. Rather than two dimensions of alignment, you have one. For us, against us, or neutral. It just is approached from multiple angles. It's neat, and I like it.
On an additional note, you could have some or all faiths treat cure spells as inflict spells when used against heretics. Forget positive vs. negative energy, as that relies on absolute good versus absolute evil. A god heals his own people, and harms his enemies.
QFT. This is the key here. Replace the alignment system with a religious belief or allegiance system.
Additional points to keep in mind:
Historically, ethnic groups identified themselves by ethnicity rather than by religion. The Irish would raid Scotland and Wales and be raided in turn even though all three groups followed the druids. Although I don't know the involvement if any of the druids in those battles. I do know that amongst the Germanic peoples (Angles, Saxons, Jutes, Danes, Swedes, etc.) the priests of Odin on both sides would perform sacrifices to win Odin's favor and ensure their side won.
Pagans/Heathens, Infidels, and Heretics were treated differently by the Mediæval Church as were schismatics and apostates (see Catholic Encyclopedia for details). However for game purposes, you could break down the classificaton of believer, lapsed or potential believers (lapsed, schismatic, apostates), and enemies of the faith (pagans, heathens, infidels, heretics). Excommunication takes on a very powerful force in the game now.
The polythesistic or pantheistic would hold a more tribal view — one of us, allied with us, or against us. Game-wise it could work the same except that allies and enemies would be more fluid. One Orc tribe could ally itself with a Goblin tribe against a common enemy Orc tribe.
And since this is all predicated on removing the alignment system, it is vitally important to define laws, criminal behavior, and taboos. And the infamous variant golden rule — he who owns the gold gets to make up the rules (and ignore them for himself).
All in all, this would make for a very interesting world. I just might incorporate it myself.