Hi all,
Thanks for the varied and invigorating comments.
I guess this faces one of the problems of the D&D system - players start off with a class, and no NPC classes (though of course you could house rule this).
Most people are something else, before they become a druid, or wizard, or fighter. They were teenagers (of varying ages) at one point, and would have knowledge buildup from there. Probably this could be completed by having them take a "background NPC class" or assigning a "background template" - this is what you know, this is who you are. You were a peasant on a farm? Then you've never read up on effective uses of cold spells. And so on.
I had always been of the mind that mmadsen describes ... You get very biased news and information from bards, and the rest is just folklore. You might hear directly from the lips of an adventurer what happened, and of course that might be biased too. Libraries, I assumed, would be found only in big cities, would probably require an entrance fee (unless funded by a patron), and would be mostly a collection of folklore, and some true and accurate books.
Thus if I want to learn about mermen, I have to travel to a city, seek out a bookstore or library, and there is a small % chance that it is actually a good book - not just fairy tales (which might contain a grain of truth). You can represent the gathering of knowledge via fairy tales, probably, by having the character amass many fairy tales, then doing an Int check to see if they can pull out any similarities. Of course, I could always find another adventurer who saw mermen and ask her!
In terms of gossip/myths/legends, though, what would be common legends? Dragons, I assume - but would they be described as having wings, a tail, four legs, and a breath weapon of some sort? Would that be consistent? What about manticores? Would they be named, or would it be "A fearsome flying lion with stones on its tail!" or something like that? Is it safe to assume that legends today are known as legends back then? Werewolves only come out on full moons, don't step on a crack, the honest politician?
hong - I would be surprised if they knew Survival - is Wilderness Lore trained only? Perhaps not, but I'd still be surprised - I couldn't take Joe Nobody out of Toronto, place them in the wild and tell them to live - and if you think Toronto's too big, well, I couldn't do that with Tillsonburg (15k people) either, or even Straffordville (600 people). Granted, we're in a different day and age, but I don't think someone raised as a blacksmith would know how to survive in the wild.
I really wish the Knowledge skills would have been different - everyone gets X + int bonus knowledge points every level, X depending on your class (6 for wizards, 2 for barbarians). And only some knowledge skills are class skills - all other knowledge is cross-class. E.g. Knowledge (monster) is a class skill for all, but knowledge (poisons) is cross-class for a cleric. If you put points into something that you didn't see on your last trip, then you need to spend time in a library.
Hmm, that sounds like a nice house rule. I might adopt that

Although it would be tough to justify knowledge (monster) as class for everyone - "you saw 300 orcs, but nothing else - that doesn't tell you anything about kobolds or howlers".
Thoughts?
zyzzyr