These boards are so much better than WotC...
Wow, we can actually discuss campaign settings with real-world religion here! What a relief!
My own setting is based upon a number of basic conflicts, and a big triangle between the forces of religion, magic, and technology is one of them, as is the conflict between the old, traditional curch and a number of other Christian churches that mimick the Protestant revolution of the real world. In setting up this campaign, I had a lot of work to do to deviate it from your typical medieval setting, because in the real middle ages folklore, Elves and Dwarves were soulless cretins and any and all magic was black sorcery...
Step one involved revising the creation myth (or creation story, if that's more comfortable for you) so that Elves, Dwarves, Gnomes, and Halflings were all created on equal footing with Mankind. I'm still trying to think up names for the "nonhuman Adam & Eve pairs" for both, and I know I want the first Elves to be Oberon and Titania, to king and queen of the faeries from Elizabethan folklore... if you can help me think of names for the first Dwarves, Gnomes, and Halflings, I'd like the help (although I know I want one of the Dwarves to be called Durin, since Tolkien took that right out of the Norse Elder Edda...)
Step two was revising divine magic so that clerical spells became divine miracles. Spontaneous curing became "faith healing," druids were replaced by a vicar class, and all divine miracles used the psion's "power check" method instead of a set DC -- and on a natural 1, the prayer isn't heard, beacuse unlike wizardry, a priest would not be in total control of what miracles he were granted. Likewise, raise spells aren't 100% accurate either, with the person in question needing to make an alignment-modified level check to see if they're worthy of being brought back. But the rationale behind miracle-working, dead-raising clerics is such that in a world full of demons and evil magic, the Good Lord would see fit to provide the side of good with an extra edge and keep things in the balance!
Step three was a biggie, and took some time to get arcane magic explained away. I didn't want all-out war between the party wizards and clerics, so I just made sure to point out that like early European folklore, there was white and black magic, just like there were good and evil faeries (an idea the early Church never approved of, but didn't really fight against). I named the three main wizard orders after the three Magi (since wizard and mage both come from words meaning "wise man" and share a root with Magi), so there are good-aligned wizard orders in my world named for Caspar, Melchior, and Balthasar, the wise men who payed homage to the infant Jesus.
Finally, I wanted wizards and technologists ridiculing and fighting one another, but I prefer clerics ridiculing and fighting amongst themselves. So, toss in Catholocism, Protestantism, Orthodox, and Anglicanism, and there's a regular recipie for fun! What does everyone think?