Since it's an all-out-There-Can-Be-Only-One war, I am no longer bothered by the lack of Diplomacy, though it was something I missed in the beginning.
However, since I recently played a four player Hotseat of good old ancient Warlords (the first one), I have to say that the diplomacy model there works really well for There-Can-Be-Only-One wars: The other races (nations) start with a specific likening towards you, which fades gradually over the time, the speed of which is determined by the things you do. Expand too fast? They'll start to fear you. Expand too close towards the cities they laid their eyes on? Only the specific nation you are threatening started to view you with more distrust.
While this would likely include more coding than fun, it is the diplomatic AI model I'd wish for Dominions. Or probably Dominions III.
