Don't forget any Dreamlands sourcebooks for useful material. The whole nightmare/dream should part of the Far Realms "experience".
I got the impression from the OP that the fiends had chosen to cooperate with the gods, to submit themselves as servants/allies in the way a powerful celestial might. In this way, the gods themselves made the choice for the mortals, as gods are inclined to normally do anyway. The PCs still get to choose how to react, but this fiend power is a god-sanctioned act.I do NOT like the idea of having fiends be the ones granting PCs their divine spells. This does not involve any choice on the player's side - a character with several levels in a divine spellcaster class cannot really be expected to "just say no" and give up his powers. You have forced a PC to be a servant of evil without presenting it as an option or giving any alternatives. The coices above are interesting precisely because they are choices - if the players choose to stay on the straight and narrow, I feel you should let them. Still, it does enforce the alieness of the situation, the feeling that the rational rules of the universe are breaking down, so if you can present it properly it might work.
On the other side of the coin, that's probably my favorite part of the whole idea. It really drives home the point that things are incredibly desperate that the fiends are not only chipping in but that the good gods are letting them.I really dislike the idea of the spells for good characters coming from the evil outsiders: what about the good ones?

(Dungeons & Dragons)
Rulebook featuring "high magic" options, including a host of new spells.