If you use your fake-method with terrain which is inwardly pulled against a plane, you can only achieve good results if you use a very high detailed terrain. The same for models. This could be quiet nasty, especially because the areas where "the floor will be" are not orthogonal at all.

When going the pixel way, you have a high degree of details. The collision detection is a good point, but doable.

Have you already achieved some promising results?

there was a 3d game called redfaction that used a so called "geo mod engine" there you could build tunnels like in liero have a look here:

http://youtube.com/watch?v=yHLRlb16w0g

to get the idea. here is some information on how it works directly from the geomod programmer:

http://john.slagel.com/Geomods.html

hope this helps you.

if you want it to be 3d i would look for a voxel engine. for example you could try voxlap by ken silverman.

if you want it to be polygon based then it would be like writing a modeling application. with functions like extrude and so on.

omg you do it all much too complicated!
use an easy bmap, which reprensent the level and if you want a tunnel paint the accoring texel, just as heelx said before.
As far as I heard it here, I guess you want to make a kind of 2.5D game?
The way I would think of how to make the map 3D is to use a kind of parallax shader. (OR you could use maybe 20 or more sprites that use that bmap and put it on top of each other, but that would still give you some small seams between it).

To realize it in 2D is pretty easy, but there is no common method I can think of that could accomplish that without some strange behavior in some case.

...the only problem with that method is collision.

However, I guess you could also do some pixel-reading instructions to see if that area is cleared first, before moving.

You can do that -or- create an approximation of polygonal regions which are tested against simple collision shapes likes circles or rectangles. I shouldn't have said "polygonal" regions, because you might think I'm talking about meshes.. I talk only about a datamodel of it for calculations.

If you have this, you move your collision shape and if it intersects with an edge of a region, it collides - bingo!.. *stop moving*. To test if a shape collides you can test certain (or special) contact points per shape. This is non-trivial to beginners, because you have to basic knowledge about vector geometry and planes & lines in particular. Though, you can make a polygonal shape around your sprite and test this agains the environment shape.. then you have pixel precision.

To simplify it, DirectX has (through Lite-C) a lot of functions for this kind of stuff to quickly make a prototype... well, this is how I would try it.

I think if you google for "pixel based collision" or something like that you will get some articles, on gamedev.net (I think) there are some.