That's the resolution of the Dreamcast's VMU, IIRC. 

What engine will this be made in?

128x128 seems a bit large per texture, why not go down to 64 or even 32?

What art style did you have in mind? 

Not even once. 

#1 according to wiki it was 48�32

#2 I want to use Unity.
128x128 is maximum I want to use. Depends on how close you'll be able to look at enemies or bodies. I would like to have wall textures in 64x64 so we can build WAD later for Quake community.
I would love to have art style like in Quake, but I don't know if this gonna work with 64x64. I minimized few screens with base textures and it looked ok. One thing for sure is that we need contrast between floor, walls and ceiling, so it's more clear to see what's going on with level.

#3 wat? 

to save time, if you are making it with quake art style, could you not use an existing community-made texture set? 

#3 ohhh ok... I didn't even knew who she/he is.
I remember previous Low Rez Jam was ok. Few cool games were created. I don't think we should worry. We don't have to have any interaction with this persona.

#5 Good idea, I'll take a look at some community WADs and see how they behave. 

...we can even load BSP mesh if you want :)
https://github.com/mikezila/uQuake1

it will require additional file (for example XML) with enemy/item positions, but that's not a problem I guess... 

The "mesh" you get from quake bsp is horrendous though - if you want to use a brush-editor to makes the maps you'd be better off making it as a quake 3 map, then using q3map2 to turn the brushwork into nice .ase models. 

Use the Wavefront obj Export in the lastest TB2 Beta. 

Just a thought - Doom style sprites looks better in low res than 3D models. And Doom's lack of vertical camera rotation also helped to avoid aliasing on vertical edges.

So, for best image quality at such low resolutions, I'd recommend a Doom style design, keeping sloped surfaces to a minimum.

The improvements I'd add on top of that are 32-bit color rendering and 15 fps animations on sprites, for well-defined and fluid visuals. 

Use the Wavefront obj Export in the lastest TB2 Beta.

I assume that's just a simple conversion of brush primitives to triangles, which will have t-junction problems?

q3map2's .ase compile will clip and retriangulate the geo when appropriate to make it more like the sort of thing you'd make in a mesh modelling app. 

I wonder whether you can even see t-junction sparklies at 64x64 res...