Battery power is cool because you can run the layout anywhere. At the open house a while back, this came in very handy because an outlet was not handy. I use three sets of batteries: 6v for lighting, 3v to power the train, and 1.5v for certain effects. Since they are D cells, everything will run quite a long time on one set; they could optionally be replaced with rechargeables.
I don't have the lighting set up to dim, but that should not be a big deal; an ordinary rheostat from an old transformer should do the trick. For lighting, I would recommend just getting a bulk pack of warm white LEDs from one of the eBay vendors that sell them; sometimes dropping resistors are included. Their ability to illuminate structures effectively is improved if the LED capsule is "frosted" with sandpaper, or painted white.