Hello Sai,
Yes, It should work with Dialog Users. Actually when we decided to switch from Service to Dialog we asked SAP if it was supported and we get the response:
"Yes you can use FFID as Dialog in GRC10.
Also please review the SAP Note 1586989 for more information. This Note also applied to GRC10."
We configured on SP10 using Dialog users and the only problem we faced was with password policies, but this can be solved as described by Collen.
Cheers,
Diego.