When I play or DM, I only use 3rd person to describe actions, like "Valdemar moves in the shadows along the edge of the courtyard behind the guards until he is 15 feet away, then charges them." Occasionally when I need to convey a certain action that doesn't require excessive motion (a posture, or demonstrating how someone is standing in front of a door trying to disarm a trap) I'll act it out.
However, for dialog with other PCs and NPCs, its all 1st person. To me, there is no such thing as "unimportant conversation" in the game- all of it can potentially be important and useful info. I don't know how many times the PCs in the games I run have talked to a random NPC that has later become a fixture of the campaign due to mannerisms I made up on the spot, or the NPC has passed on some bit of info I improvised. Its also a lot of fun to watch the players talk to each other's PCs in character- some hilarious misquotes and verbal misunderstandings have occurred due to this- and it really adds to the fun of the game for us. In addition, by acting out my PCs or NPCs actions, you can roleplay through things like Bluff, Diplomacy, Sense Motive, etc checks by behaving appropriately and put them in context. If the NPC rolls badly on Bluff, I'll act uncomfortable, shift my posture often, and dart my eyes around, while if he rolled well on Diplomacy, I might try to play it off by projecting a confident demeanor with articulate language and coherent arguements. This adds a lot more to the game than "I make a Sense Motive roll of 23- is the merchant lying?" junk. True, some folks have a little trouble getting in character or are embarassed, but I've found even those people get a lot more comfortable and enjoy it in a short time if the rest of the group encourages them to keep trying and congratulaing them on a good job or portraying their character.