I have thought myself about doing a city at the side of a mountain. I think it can indeed be done. You could either only use backgrounds to achieve this. Or you could do special walls, but the problem is that you have only two slots for most distant walls and only three for the distant walls. Therefore, you cannot achieve something with a steady slope. However, something stairlike could be achieved as long as you leave the most distant walls out (you could either do the latter by not using areas longer than two squares or by doing a kind of fog or darkness effect for the most distant walls).
Or perhaps you can make Manikus and Paul support a wall format with 5 distant and numerous most distant walls - than it would be relatively easy to do a slope...
The big alternative would be to use multiple levels to achieve this - then I think it can also be done in a very convincing way, but it would be a lot of effort both in terms of graphic design and level organizing.
Look at http://ua.reonis.com/index.php?topic=3070.15
- the "rooftop technique" Manikus and I discuss there would be the base of what I would try to do. The great advantage is that you can do this already with the existing wall formats.
EDIT: I thought this over, I guess you can also use the rooftop technique within the same level if you want to, but it might be difficult to keep the overview then.