Marco's idea is very interesting, but sounds very difficult to impliment. I'd like to see it done though.

I animated a dress using Lightwave's motion dynamics then exported as point animation. Even then, it is very hard getting it so that the material stays out of the rest of the model.

MED doesn't have motion dynamics, so you'll have to look around for an application that will do the job for you.

It would be very nice if Game Studio had motion dynamics built into it. Maybe something to suggest for Engine Future?