It's not for nothing that Alice in Wonderland begins with Alice musing that the books she has to read have nothing interesting like pictures or conversations. It's the conversations we're interested in here.
Dialogue should not, however, be used to reveal plot:
"Jim, what are you doing up here, on the second floor of the warehouse. You know that I'm the only one who watches this floor at night. Good lord, are you carrying a knife? I certainly hope you aren't feeling 'stabby'"
"Grah", said Jim.
Good dialogue reveals character. That is its nature. Take Stephen King - his dialogue has been both praised and criticized... for the same reason. He writes as people speak. Whenever I've "noticed" his dialogue, it's usually when he's chosen some really obtrusive expression that serves to add a layer of shading to his characters, but in these moments, actually breaks the flow - not good. (I'm thinking about "Happy Crappy" and other similar bon mots - which seem to be a favourite of King's) When I don't notice the dialogue is paradoxically when it works the best. The Stand is built on the back of amazing, natural dialogue.
Dialogue-only scenes in stories can either work, or wreck your flow. Without any modifiers, you can have a quick and pacey read that delights (David Barber's Two Blokes series are a great example, by one of our contemporaries, no less - and also shows how dialogue can reveal character and class status)
Done wrong, these scenes turn into a garbled mess that leaves the reader wondering 1) Who is talking and 2) What the hell's going on and 3) What's on TV, this story is garbage.
Shakespeare wrote amazing dialogue - it wasn't natural (it's in metre fer chrissakes) but it does the job, and it obviously stands up.
The Taming of the Shrew = dialogue 101. (Plus John Cleese...)
Now, what about "unnatural dialogue?" (on purpose)
It's easy to get carried away. Take a look at this clip by Kevin Smith:
This leads to another point - dialogue can also overwhelm. It's a major criticism of Kevin Smith that most of his films are just skeletons on which he hangs clever pop culture dialogue. I would argue that there is a place for that. It's totally entertaining, but it takes the film out of the realm of reality, and we don't learn much about the characters. Counterpoint - here is a clip from "Chasing Amy"
I'm picking some broad examples, but that's to make sure my point is clear. The dialogue may be a little over the top, but you'd have to agree that you now know exactly what Affleck's character is thinking.
Another famous example of dialogue stealing the show is Quentin Tarantino. His films are acclaimed on the basis of his twisty, pop culture laden scripts, but no one would call the dialogue "natural". But, it's not because he can't do it:
This is a single moment in a film full of great "dialogue" scenes, the likes of which Tarantino is famous for, but this tiny, realistic moment here tells you all you need to know about Brad Pitt's character, and not a reference in sight.
The point of all of this is to think about your dialogue.
Make it work for you, and know that when it's working best of all, it will stand out, by not standing out. (Or it will glow in the dark and be the very point of your story - but in that case, it has to be on purpose).
(P.S. - Speaking of Tarantino - Jodi MacArthur's running a contest at her site to promote the release of an anthology based... wait for it... on the song titles from the Pulp Fiction soundtrack. How cool is that? Go there... win gum.)