I think "decal" lights, where a texture is rendered on the wall in a second pass, are best for weapon flashes, etc.
If you terrain is high-res enough, use hardware lights, otherwise use decal lights. They look about the same on a high-res terrain, but decal offers a little more control.
Your characters and moving things should each be rendered in a separate pass, where you set up lighting based on what lights are visible to the player. Use a visibility line check, and you will get a good approximation of the correct lighting when standing in the shadows or in direct light.
If you terrain is high-res enough, use hardware lights, otherwise use decal lights. They look about the same on a high-res terrain, but decal offers a little more control.
Your characters and moving things should each be rendered in a separate pass, where you set up lighting based on what lights are visible to the player. Use a visibility line check, and you will get a good approximation of the correct lighting when standing in the shadows or in direct light.