Action is character. But so is dialogue. This is one of the biggest windows on your character's soul -- it's immediate, it isn't filtered through the narrator, and it can say so much both bluntly and subtly. We all glean information from every word people say. We all draw conclusions from what we hear and how it's said, we infer meanings and (hopefully) reflect on the motivations behind them. And the things left unsaid.
Good dialogue invites the reader to do this with the characters. To listen to them as if they were real people, and by extension think of them as real people.
This will tie deeply into world-building, in tomorrow's post, but the more character-based side of the words a character uses depends on his personality and emotional state.
People alter their word choice based on their emotional state, and it's not always a conscious thing. To use myself as an example, in very emotional situations I tend to step back, mentally -- retreat, if you like -- and become objective. And my words change accordingly, sliding toward bigger, more "intellectual" words with less emotional impact. The intent is to defuse the situation and diffuse the emotional content. Though, as I said, it's not really a conscious decision on my part. I'm sure it tells people a lot about my personality, though.
Other people, when they get emotional, plunge into strong, high-impact vocabulary that has an effect like splashing gasoline around a fire. This can include swearing. It could be words with violent connotations. Ultimately, it tells the reader a lot about the character and his temper, though.
Short sentences feel quick. Long ones slow the pace down. This goes for dialogue as well as narrative, and speaks to the mental state of the character as much as word choice. In a high-stress situation, who has the time to deliver a Shakespearean monologue? Who has the mental distance that it indicates? Sentences naturally shrink when things get rough. Sometimes just down to a single word coded with lots of meaning. (See Coding, which will come later in the week.)
Outside of stressful situations, consistent use of short sentences versus long can indicate something about a character's education, intelligence, or integrity. Or, perhaps, the environment they grew up in -- children will mimic the speech patterns of those around them, unless they make a deliberate choice not to.
On a more abstract level, the things a character talks about tells you what he considers important.
Nobody can maintain perfect awareness of all things; we all prioritize and focus on what matters the most to us.
We've all seen this in action, on the internet: that person who always casts a discussion in terms of gender inequality, or skin color, or animal rights. It's what's important to them, so they focus on it.
Or that person who always pulls a topic back around to this story they wrote... :)
IMO, the best way to learn about these aspects of dialogue is by listening closely and objectively to real conversations. When you're part of the conversation, it can be very difficult to maintain the analytical mindframe you need -- or jot down notes, if you need, as well.
That's why I'm an unrepentant eavesdropper. If you're anywhere near me in a diner or a coffee shop, I'm listening. For innocent reasons, though. Honest.