Anyway, to bring it back on topic: wouldn't adding more races to the mix dilute them all? I mean, with only four races, it is very easy to make them distinct. But when you start adding in more and more races, the gap between them all gets a little more narrow and everything starts sounding alike.
I don't think so, no. In a world with only 4 races, each race has a lot more room to develop and differentiate. Take real-world humanity for example, while physically we're all 99% the same, there's still TONS of variety. This would hold true for a world with few races as well. Each race may have their "core" ideology, ie: dwarves live underground and are good with stone, elves live in forests and love trees, halflings live in burrows and well...aren't all that unique, humans can do everything. While that may be the core, in actuality all of these races are going to branch out in the same way humans do. There would be elves of tropical, temperate, scrubland, there would be dwarves who live deep in the mountains, those who live nearer to the surface, and those who live above ground! Just in the same way that humans do live everywhere, those parts of those races would adapt to those conditions over time creating unique cultures.
Fewer races inclines each one to be less specific. Dwarves may in general be hardy and like their ale, elves may love trees, but really that's about all you'd find in common unless you are IN the homeland of a specific culture. You couldn't expect someone to play your standard irish-parody dwarf at the table because there's no guarantee that in the world that's how all dwarves are going to be. In fact your dwarf may have dark skin, live on an island and sail.
Of course as diversity within a few races grows, the more the line blurs. Whats the difference between a human who loves nature and an elf? How exaclty ARE halflings not just short humans? How does a dwarf who lives above ground act any differently from a city-born human?
In fact more races will inspire each one to be more specific, as there is less room in the world, each race is forced to stay within the group, to stick to what makes a dwarf a dwarf, an elf an elf, ect... Elves love trees, dwarves love stone, tieflings are evil, dragonborn are honorable, and while all races may have all these traits, each race is almost forced to exemplify it to the greatest degree given that if they don't, they're really no more than any other race.
I think it would be better to focus on the "core four," make them as different and distinctive as possible and putting the rest in supplement books.
Personally, I won't buy a PHB1 with 4 races, @ $40 a book, it's simply not worth it, secondly, I don't want to wait years for Wizards to get around to publishing the races I like(since I hate half the "core four" races).
That aside, I think if you really look at the races, without making them stupid parodies of real world cultures, the "core 4" are a lot more vague than you're giving them credit. Forcing them to be the most dwarfiest dwarves or elfiest tree-hugging elitist jerkwads to have elfed I think does them a discredit.
And really, how ARE halflings not just short humans? Burrows? Not good enough.