I've gotten plenty of laughs out of the diplomacy in Civ3, but for my money, the funniest line in any Sid Meier game came from way back in Colonization.
As veteran players of Colonization know, the King often tries to raise your tax rate. You can respond by giving in (and kissing the royal pinky ring), or defying him and holding a "tea party", sacrificing some of your resources and refusing to trade them. There's a long list of resources, and the game selects which one to sacrifice based on what you currently have on the docks. So you can have a Cotton Party, a Tobacco Party, an Ore Party, and so on.
Well, one time I wanted to defy the King, and the resource up for sacrifice was Horses. So I chose the party and got a message that went something like:
New Amsterdam Horses Party! Dutch colonists throw 50 tons of Horses into the sea at New Amsterdam!
The image of a bunch of men struggling to hoist horses above their heads and throw them overboard nearly made me fall out of my chair with laughter.
Ah, Colonization, still one of my favorite games after all these years, and currently the only reason for me to use DOS-mode on my PC.