Is it even possible to have a game with moderately good graphics the size of Daggerfall?
Certainly. The problem is that computer generated stuff tend to be rather bland (as seen by the Oblivion landscapes) and lack that extra detail that many gamers been used to now. I think it would take a great deal of effort to make it generate good stuff, which in the end might not be worth it as so many people are pleased with the hand placed stuff anyway.
Minecraft does that already. Prior to their 1.8 patch, if you started heading in one direction, you'd travel 12,550 KM before hitting the end of the world.
Mincraft is extremely bland though, even more so than Daggerfall.
Random content is okay when supplementing a small gameworld, like Diablo, to make it feel like there's more content. But Morrowind, Oblivion, and Skyrim are huge enough as it is, so I don't think they need any random locations.
I always felt Morrowind, Oblivion and Skyrim were too small. I wouldn't need that much larger gameworld to be pleased though, 4x the Oblivion landmass would be nice enough, including 4x the city sizes.
One thing I really liked in Daggerfall, which partly is thanks to the huge world, is how anonymous the player character is, while in the later TES games all the game world changes are all thanks to the player and everyone knows the player.