I have to say that for me the opening section was disorienting. But, here it is, another of my prejudices - so take what I say with a grain of salt, please and realize it is only my opinion. I am extra hard on dream-sequences - because actual dreams are so rarely like the ones in stories. I just found this dream a bit too solid and real and not at all dream-like. I was confused (granted not for very long) over what was happening. So my question to you is this: what purpose does this dream serve in the story? I am not sure precisely what effect you want it to have here. Is it to keep the reader in suspense? Does it have some kind of symbolic meaning? Is it just to show that Lulu and Auron's bond remains strong in her subconscious even though her waking mind is currently shying away from him due to recent traumatic events?
As to your latter three questions: yes, yes, and BINGO.
There's a lot going on here. Some of it is by design, and some of it is because it just felt like it needed to be expressed. I'm riding that board. :)
I have been studying dreams in my depth psychology classes lately, and in fact just spent a semester writing down all my own dreams and applying various dream analysis approaches to them from the purely scientific, to the Freudian (which in its original form as he wrote it out isn't QUITE as annoying as popular culture makes it out to be), to more modern or non-western techniques. I still don't understand a tenth of what I've studied, but dreams are a lot on my mind, and I've been reading a lot of case studies and example dreams.
You're right, this dream is slightly too like reality, although I have had had two in my life that were this vivid and coherent. They were the exception.
Let me lay out the context of this dream, because this was my dream, not Lulu's.
Background: I had been flailing on this chapter ever since I wrote the mind-rape, and was finding no satisfactory way to bridge the transition from Yojimbo's cave back to the rest of the party. I posted my best attempt last Friday, and trekqueen said it didn't "grab" her, so I removed it. I went to bed discouraged and reviewing possibilities. The next morning, just as I was waking up, I had this dream somewhat from Lulu's perspective and somewhat from outside. I wrote it down in a rush, profoundly stirred by it, and it helped inspire me to write all the rest up until they reach the camp.
I sent Trekqueen the unpolished version, and she found that the comments by the side-characters were especially hard to follow. Also, once fully awake, I saw that what I'd written down completely failed to capture the powerful emotion and vivid visual image that was very moving to me.
So I first added in some stage directions and filler trying to make the dream sequence a bit more easy to follow-- and at the same time harder. I do like puzzling my reader at the start of a chapter; if you'll look closely in the current chapter, I started with Auron watching a girl on a cot and took my own sweet time revealing her to be Yuna, not Lulu. Assuming I haven't annoyed or lost my reader completely (the danger of this technique), she will read the scene for the first time from the same ignorant thrown-in-the-deep-end perspective as the characters, who don't know what's going on, and hopefully go back and reread that section once the "aha" moment has occurred, now seeing things from Omniscient Narrator perspective. It makes a chunk of the story read two very different ways. I am extremely fond of multiple layers, of saying one thing while meaning something else, in order to make comments or hints about both. (Again, in the introduction where Auron is studying a girl's face, he comments on her left eye versus her right as a symbol of Yuna's mixed heritage, but at the same time, due to the ambiguous identity of the girl at the scene's beginning, it's a faint comment on Lulu's uncovered and veiled eyes.)
My second goal was to capture the emotion and imagery which had so captivated me. Remember how strongly moving that FMV with Yuna dancing on the water was, the first time you saw it? This dream affected me that way. The colors were intense. I ache at not being able to paint the central image of Auron and Lulu facing each other like the two of cups on the most beautiful Tarot deck in the world, while Yuna dances around them. I was trying to use words since I can't paint.
Then I got into a bit of dream analysis -- examining the individual elements and enhancing them slightly to make the symbolism more explicit. I saw symbolism everywhere I looked. Wakka's hangdog expression on the dock, and Yuna telling him "no tears". Tidus being caught in the undertow. The sun/moon imagery. The colors. The tentative footing. The relationship of each of the other characters to Auron and Lulu, encapsulated in such tiny brushstrokes. The color symbolism. Sunset as death. Tears as pyreflies, carriers of memory. Union and dissolution, wedding and death, love and parting. The more I looked, the more I saw how the dream was reflecting many things about these characters in general and the story I'm writing in particular. It will continue to play out and resonate.
Speaking of Lulu's own unconscious, the moment that she's dreaming it -- when she thinks she is dying, and in fact is returning to life -- is important. It is a resurrection dream. The tears are pyreflies, but they are actually, really, Phoenix Down, only she doesn't yet know it. The moment of her "death" is actually the turning point for her back to healing. That is the general theme of the story-- she's serving as Auron's stepping-stone to death, he's serving as her stepping-stone back to fully lived life. (I'm not sure how I'm going to pull this off yet, but it's my goal.)
I noticed that this dream falls under the "wish fulfillment" category of dreams, so I enhanced Lulu's give us one more moment at the end very slightly, and made the wedding imagery slightly clearer. It's wish fulfillment in two ways. First, it's Lulu's unconscious wish. I hadn't intended to have Lulu and Auron fall in love this much, certainly not this quickly. But it is very common for people's unconscious desires to be articulated far more strongly in dreams than when they are awake. So here two unfufiilled wishes are being realized -- a bond of love between Lulu and Auron fully and sweetly affirmed in a ceremony, and (just as important, and just as impossible) their friends being aware of and supporting it. However, this dream comes when Lulu thinks she is dead, and it also reflects another aspect of their complicated relationship: she is profoundly aware that he's dead and will soon have to leave. (I have the feeling she almost loves him more because of it, like the beauty of a snowflake.) So her unconscious is supplying the idea that in death, she can be with him.
The second wish fulfillment aspect is that many of us Aulu fans harbor the romantic wish to see Auron and Lulu really together, really marry or be in love, instead of writing them with reserve, or having the relationship cut short. This is the only way they can get their "happily ever after" -- in a dream.
I found this dream inspired my writing. As soon as I had it, suddenly the rest of the chapter wrote itself almost to the last paragraph. It wasn't on purpose, but most of the characters' "real" actions echoed their dream actions, like Rikku's cheer or Valefor's dawn-feathers mirroring the sunset. (Symbolic of the death/life reversal of sunset/sunrise). I don't mean to imply that Lulu's got the power of foresight, but to play with one subcategory of waking dreams: there are many case studies where someone dreams something, and then it seems to happen, when probably the person was still half asleep and perhaps dreaming for a few seconds after the eyes opened.
Finally, since this dream had inspired my writing and gave me a sense of peace and grounding for the rest of the day, I decided to use it to have that impact on Lulu. I have the sense that the "Kilika sunset" dream may help counteract the nightmares of the Yojimbo experience, although for a while, she's going to have a painful tug of war between the two. (I've run into this effect myself. The unconscious will sometimes gift us with an incredibly affirming dream during a very painful period.)
I hope and expect that some tiny hints and echoes of this dream will weave themselves into the rest of the story, as Lulu integrates the experience.