Fantasy Brainstorming: A Seaside Town with Sea-Blooded Nobility

I have some vague ideas crawling around my head about a potential setting for a Lamentations of the Flame Princess (Grindhouse Edition) game. Unlike my previous, wilderness-centric D&D settings, this setting will be urban, and with a somewhat more advanced technology than usual D&D, to follow LotFP's Renaissance atmosphere. Inspiration would be Lovecraft's works, Michael Scott Rohan's Winter of the World saga (to a small degree) and my second favorite computer game ever*, Thief: Dark Project.

I'm undecided yet between a small-town setting and a big city setting, though I'm leaning towards the former for a more flavorful setting with strong NPC personalities, as well as a fully-detailed dungeon under the town. But I'm open to suggestions nonetheless.

The town would be situated on the shores of an ocean, with the old town originally built on a cliff, and the newer quarters growing around the docks below it. The town is past its prime, with many crumbling buildings in the Old Quarter and with rife crime in the Docks and a lot of filth spewed into the air by the new Manufacturing Quarter. The kingdom to which the town belongs is in bade shape (my initial thought was something along the lines of a shaky, corrupt restoration of monarchy after a revolution and a bloody civil war), and the roads inland are not very safe.

There is intense rivalry between the town's old nobility, the descendants of seafarers of old, and the newer and wealthier merchant and manufacturing barons. There are rumors about the old nobility being involved in unwholesome sorcery, while the old nobility views the rising merchant class as a group of rootless upstart with no real legacy.

The big secret is that the old nobility in the town are Sea Blood (as in Realms of Crawling Chaos) - they have been inter-breeding with Deep Ones from time immemorial. This is only fully known to the elders of the old noble families, with the truth kept in the shadows from the younger nobles. Those of noble blood have some sorcerous abilities, are long-lived and become deformed as their age; but the sorcery is attributed to a long tradition of magecraft, and the deformities to inbreeding, and many lesser members of the noble families don't know much about their heritage until they reach an advanced age (if at all).

PCs could play characters of Noble Blood. This will be a custom class which would replace the Elf, and have Magic-User spells instead of the RoCC Sea Blood's Clerical spells. Their XP progression would probably be faster than the elves', with the catch that they'll become deformed over time. Of course, Noble Blooded PCs won't know about their true nature until they reach a high level... And then, they'll be in for a nasty surprise!

There would be no Elves in this setting. Dwarves, however, will exist as Duergar, or the Elders, a dying race which has predated Man and is now being usurped by Humanity (actually they're an evolutionary offshoot of the Neanderthals who took refuge underground when most of their race died), and use the LotFP Dwarf stat.

Comments would be welcome.

* My all-time favorite computer game is the original System Shock. My 3rd favorite is S.T.A.L.K.E.R.