: How should dialog be formatted? Is there any "official" rule that I should keep in mind when formatting character dialog? Line breaks, placement of quotes, mixing dialog with action descriptions

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You should buy "Self-Editing for Fiction Writers." It's one of the best dialogue books for both fiction and non-fiction.

See www.amazon.com/Self-Editing-Fiction-Writers-Second-Yourself/dp/0060545690/ref=sr_1_1?ie=UTF8&qid=1299858506&sr=8-1

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The best way to learn who to properly write and format dialog is to read. Go sit at the bookstore and see how everyone does it. There are exceptions to every "rule" and reading a lot of different books will help you learn what works and what doesn't work.

I'd also recommend reading Stephen King's "On Writing" since he covers tips on writing good dialog.

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One possible correction:

"I've come to offer you a gift." He
paused and, sensing that she wasn't
going to say anything, continued.
"Your money and position back."

You need a period at the end of the first quotation. Otherwise, it reads as if he paused those words, which doesn't make sense.

An alternative:

... continued, "Your money and position back."

If I were writing this without a pause, I might write it with a colon (though colons seem kinda awkward in casual dialogue):

"I've come to offer you a gift: Your money and position back."

I don't see a good way to stuff both the colon and the pause into the paragraph. This doesn't seem right:

"I've come to offer you a gift:" He paused and, sensing that she wasn't going to say anything, continued, "Your money and position back."

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First, commas indicate pauses, so put them where a speaker or reader would naturally pause.

"Look, Jones,"

That one is important, because there's always a bit of a pause between a command and a name.

Second, imagine how your speakers are moving physically. Does Dan just point briefly? Does he only mean the castle will belong to Jones? Does he make a sweeping gesture to take in the castle, the grounds, the cliff, and the sea? When does he point?

Gestures mean pauses, for dramatic effect. A short pause is a comma, while a longer pause can be indicated by a period or an m-dash. If you want to emphasize the castle (as opposed to the cliff, the sea, the horses, or the knights behind them), use italics. (I'm changing "Dan" to "he" only so there's no confusion about starting a new sentence.)

"Look, Jones." He pointed at the
castle. "This will be yours someday."

"Look, Jones. This — " He
pointed at the castle. " — will
be yours someday."

"Look, Jones." He pointed at the
castle. "This will be yours someday."

I sometimes trip over the m-dashes, but generally speaking, you end your quoted material with the m-dash, put your interrupter narration in the middle as a complete sentence, and then pick up the quoted material with an m-dash and a lowercase letter, not a new sentence.

Third, to answer your question more specifically, to use commas around interrupter narration:

The narration itself, without the quoted material, should not be a
complete sentence.
The quoted material should continue
a sentence.

"Look, Jones," said Dan, pointing at
the castle, "and you'll see what I was
speaking of before. This will be yours
someday."

If the quoted material starts a new sentence, then end your sentence at the end of the interrupter narration.

"Look, Jones," said Dan, pointing at
the castle. "This will be yours
someday."

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That's totally up to you, every writer is different, blablabla...

Honestly, if you are interested in formatting, pick up some novels, there are different styles, choose one.

But your problem looks more like "guiding the reader" or "building tension". See, you want to emphasize "this", not "look around Jones". So you should say "this" and point to the castle. I vote for number 2.

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