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I think just "Legend" doesn't sound entirely right. Giving it a name like "Legend: Enter the Halfworld" or something is, in my opinion, much better. After all, they've done the same thing with Zelda (The Legend of Zelda: Ocarina of time/seasons/ages, Link's awakening and so on), although Nintendo's excuse is that there are numerous games with the same main characters.
As for losing experience, that is something which just has to be included, because it is actually quite original and that's just what we want. But, once you've spent a certain amount of time learning a skill, you'll never entirely forget how to do it. You may get a lot worse at it (which is especially dangerous if you try magic), but you'll always remember a bit.
As for the quests, I think that I would always do as many quests as I can find, just to get the experience. Maybe you should balance things out a bit, like when you don't do a certain quest, you'll be offered another one, which you couldn't access before, or the MQ gets a bit longer. There might be a forest in the way, filled with smaller creatures to give you the experience you missed for refusing the quest. This also offers more oppertunities for evil characters who don't want to help everyone out but do want the experience. This also gives the game a higher replay value.
So, if you don't force players to do quests, but still give them an oppertunity to advance in level, people can really play themselves in the game.
Even the MQ doesn't have to be set. Sure, you'll need that sword and have to defeat the Upholder, but when and where you attack him depends on where the Upholder is. Maybe you've convinced some townspeople to lure the Upholder out of it's lair and into the open, or it may decide to travel somewhere else himself (with an entourage of mosters, ofcourse). The sword too, could be moved. If you take your time playing through the game, the Upholder's minions might retrieve it, or maybe there's a third party selling it to the highest bidder.
And then there's the tutorial. Other than learning to move around, I don't think it is nessecary to include one in the game. As soon as you join a guild, one of the members can start lecturing you, telling you about the skills you may learn. When asked, other townsfolk might help you too, offering directions, telling where to find quests or explaining a new skill you've just gained. Then again, maybe they would cower before your might (at the higher levels, that is).
Finally, the dog thing. It is a good idea, and it may be fun too. You may even let the character train the dog instead of practicing for the guild, teaching skills like fetch, stay, guard and roll over (which may have some use I haven't figured out yet), or, instead of a dog, you may get the Halfworld equivalent.
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The last arrow of Legolas kindled in the air as it flew,
and plunged burning into the heart of a great wolf-chieftain.
All the others fled. -J.R.R. Tolkien, The Lord of the Rings
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