I've heard the combat in this game is pretty poor, is it possible to avoid most conflicts through correct dialogue choices?

There are some that can be avoided through dialog and others that can be avoided physically (by sneaking/invisibility/etc). But there's still a good bit of fighting in certain areas. Really though, the combat isn't HARD... it's just fairly unsatisfying compared to the other IE games. The combat isn't the focus of the game, of course, and compared to things like Baldur's Gate, there really isn't a whole lot of it. You will need to fight a decent number of monsters throughout the game, though.