I think this is a great idea, and would make for some really interesting gameplay. Yes, levels of language could definitely be implemented. Although it certainly could be frustrating to travel through an entire cityscape where you don't speak the same language as anyone else, it would make for a unique challenge, and maybe even open the door for some specific character builds (the word Laleomancer, came to mind, so I'll stick with that). And, of course, this difficulty could be mitigated by having their be a guild whose specialty would be to hire out translators for a given period of time. This, again would add another level of intrigue and challenge, as the internal politics of the language guild (League of Laleomancers?) could conflict with local politics, with the character's own interests, etc.
Ok, I'm getting too wrapped up in this. But in short, yes, different languages would make for unique gameplay.