The original distant landscape textures that shipped with Oblivion were terrible, so this problem got a lot of attention from modders very early on.
In the past, most people used Shaja or CaptnKill distant landscape textures (LandscapeLOD) because they add a lot of detail to the distant landscape. Unfortunately, the detail they add is created with a random noise filter, which meant they never matched well with any other landscape textures.
Fortunately, Bethesda dramatically resolved this issue with the official 1.2 patch -- which adds a new distant landscape shader with a built-in noise effect. This makes solutions like Shaja and CaptnKill completely redundant (since there's no point in having two noise filter effects layered on top of each other). It also dramatically solves the ugly problem with the transition from mid-range textures to distant textures by smoothly blending the transition, regardless of which LandscapeLOD texture replacer you use (and even if you don't use any LandscapeLOD texture replacer).
However, even with the 1.2 patch, you may still want to add a mod like the Better Tiling LOD textures to better match landscape replacers like QTP3. The rest of this discussion (except for the comparison of noise effect replacer strengths in Table 3 below) is much less relevant with the official 1.2 patch, but it may still provide some useful guidance if improvements in the 1.2 patch alone are not quite enough to satisfy you.
The Better Tiling LOD textures provide a perfect alternative to the Shaja/CaptnKill solution, and it works very nicely with the official 1.2 patch. When used in conjunction with QTP3 or QTP2: Better Tiling for Qarl 1.11 landscape textures, the Better Tiling LOD mod provides a smooth transition to distant landscape. However, it does not offer quite the same level of detail as Shaja or CaptnKill LOD textures by themselves (you can solve this problem by adding Qarl's Compressed 4096 LOD Normal Maps, but these will soak up a considerable amount of additional VRAM on your video card). You'll have to decide for yourself which one you prefer.
In the following screenshots (all taken prior to the official 1.2 patch), you can clearly see the difference. Bethesda's original LOD textures are extremely blurry and there is an abrupt shift midway into the distance, where the normal landscape shifts to distant landscape. Shaja 2048 and CaptnKill 4096 both offer much more detailed and interesting distant textures, but they still suffer from the same abrupt shift problem. In contrast, the Better Tiling LOD textures make the shift from normal landscape to distant landscape almost invisible (when used in conjunction with QTP3 or QTP2: Better Tiling for Qarl 1.11 landscape textures).
LOD Comparison Table 1 (Oblivion 1.1)
original LOD (vanilla) | Shaja 2048 | CaptnKill 4096 | Better Tiling 4096 |
Most other LOD textures (Zacharot, buhay) are similar in appearance to the Better Tiling LOD textures, but do not blend as well with QTP3 or QTP2 Better Tiling 1.11 landscape textures. Zacharot has the widest selection of styles, but the differences among them are not dramatic. If you prefer the Shaja/CaptnKill approach, then you may want to consider using blade9722's improved versions of these (as opposed to the Better Tiling LOD packs -- see the mirror links below). Installation for LOD textures doesn't have to be done in any particular order (you can safely ignore their position in the list).
The high system demands of QTP3
combined with new landscapeLOD options suggests that it may be best to
evaluate your options in terms of the performance impact they will have
on your system. Let's start at the low end, with the least taxing
options, and slowly move our way up to the most demanding. The
following table presents three sample screenshots from each
configuration option (all taken before the 1.2 patch).
LOD Comparison Table 2 (Oblivion 1.1)
| Original LOD + DoF | BTQ 2048 + DoF | BTQ 2048 | BTQ 2048 + Q4096Normals |
 |  |  |  |
 |  |  |  |
 |  |  |  |
| BTQ 4096 + Q4096Normals |
 |
 |
 |
For some 256Mb cards, removing all LOD texture replacers can dramatically alleviate the burden of running QTP3 and turn what might otherwise be unplayable experience into a very pleasant surprise -- as long as you're not looking at distant landscape very often. You can improve this experience quite a bit if you don't mind using Qarl & Timeslip's Depth of Field mod since it de-emphasizes everything in the distance (it blurs everything in the distance so that any problems there become much less obvious). This configuration is shown in the first column above (Original LOD + DoF).
If you can stand losing a bit more performance, then consider adding the BTQ 2048 LOD textures, either with or without DoF (shown in columns 2 and 3 above). If you're bothered by the blocky compression artifacts that sometimes appear under certain lighting conditions (usually at dusk and dawn), then consider adding Soor's LOD Uncompressed Normals MipMap Fix, but be aware that this will have some impact on performance and won't make much visual difference under normal circumstances (this option is not shown in the comparison above because it made no visible difference during the time of the day when the screenshots were taken).
If your system can handle all this with ease (mostly 512Mb or bigger cards), then consider adding Qarl's Compressed 4096 LOD Normal Maps (shown in column 4 above). Finally, if you still have more room to spare, then replace the BTQ 2048 LOD textures with BTQ 4096 LOD textures for the very best (and most demanding) experience possible (shown in column 5 at left).