Just for fun, while looking at this type of structure, you'll often see a reply starting a whole new topic/conversation thread... being able to promote such a sub-thread out and make it a new top level post/conversation would also be an excellent option.

Would like to voice support for this suggestion - though i think "threading" of the posts would be more apt as a description :)

The "block quote" mechanism confuses the evolving conversation when you are replying to a conversation that was five items earlier in the conversation, and also leads to lots of repetitive information when you have lots of replies to the same conversation.

A comparable mechanism would be the threading on posts on Slashdot.