What is the basic premise behind technology such as is found in Oblivion (and other games, I\'m sure; haven\'t played enough to know), wherein objects from afar are vaguely show
For 3d models, the technique is called level of detail. Essentially, multiple versions models are kept available the the right one use based on context. It is not always just for distance, it can also be used to maintiain framerate in other situations.
Be careful though, you should have mipmapping enabled or you'll get sparkling on the larger textures on the lower res models, and be careful of animation. Switching the model beneath an animating skeleton is tricky so one technique is to maintain the same skeleton even when LOD-ing the model.
There are dynamic LOD systems for both terrain and for object models, but these can be CPU heavy.