The YouTube user TomWalks uploaded a amazing video featuring several different examples of destruction simulation within the BGE .
On the description he says:
I spent the last two week searching ways to break things in Blender, or to give an effect of. Here is what I managed to do with the Blender Game Engine and the Logic Editor. For now. The Blendercookie.com tutorial on "how to create a simple game" gave me the idea, like relations between objects.
Everything was made in Blender 2.57.