Well...technically, while the concept of interaction was eventually dropped, Square did use the graphics presented at the demo and shaped them to eventually become Final Fantasy VII. From the moment of the demo to the end product of FFVII, the developers managed to refine the engine without the degree of memory restraint the cartridge format had, which was part of the decision for Square Enix to move to the Playstation.
As for a 3D game based off FFVI...well, consider that the remakes of FFIII and FFIV were handled by Matrix Software, so any DS game that relates to the original Final Fantasy series will probably use the current sprites. In those games, the touch screen interaction was quite minimal, ranging mostly to emulating mouse movement and pinpoint selection. Revamping the interactive concept presented at the demo may cause some troubles with other existing companies, such as Konami (who incidentally used a similar procedure for the first Castlevania DS game, albeit in a very limited manner); not to mention the entire system may feel a bit awkward. Sequel-wise...FFIV had a nostalgic sequel given that they could work something out, but FFVI has various difficulties representing that. It doesn't mean a prequel can be made (it has been suggested at these forums, given the entire period of the War of the Magi was only touched), but it makes difficult for a sequel to be made.
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