Maybe you could use that idea and scale it down? I think the exterior would be relatively simple; just crenelated walls with the gobelin stitch bricks (bordered in continental stitch); and then a drawbridge door (bonus points if it works!), and a couple of arched windows (stained glass also for extra credit). If this is what you are referring to - http://www.thetws.com/toys/My1-6th/barbiecastle.htm
- most of the exterior shapes are relatively geometric, like hexagonal or octagonal towers (just six or eight long rectangles whipstitched together), and the walls are large rectangles with sections cut out at the top for the crenelations. Then you'd just have to cut out a door - rectangular would probably be fine.
The interior is where things REALLY went nuts. I think if you simplified the shapes, like using boxes with a straight back for chairs (no legs, that would make them too spindly for real play; plus, a "box" with a straight back I think is more realistic), you could really go to town. You'd need a throne room; a dining hall (I don't see what'd be wrong with long rectangular prisms as benches); a bedroom (beds are pretty simple, too - rectangular prisms with a "headboard" and even a footboard if you want to get fancy); and - why not - a fancy bathtub, but again you might want to keep that simple shaped and have the embroidered part really shine.
For dolls, the simpler, I think, the better, if you are wanting to create something so complex and large scaled, just so you don't drive yourself nuts. There are tons of amigurumi patterns out there; you'd just need a simple humanoid shape that you could subsequently embellish with hats, hair, capes, crowns, and swords, I think, to populate the grounds. I would recommend "Creepy Cute Crochet" which is a GREAT amigurumi book, and all of the dolls in it are simple but embellished. One of the more difficult projects in there is a knight. If I remember correctly, none of the dolls have arms or legs, but you could still put a crown and flowing hair on a pink-dressed basic-shape for a princess; a crown and beard for a king; a crown and updo for a queen; a funny hat for a jester, and so on.
I'm sorry to have responded so late; this would have made a very interesting discussion if I had found this four months ago!