I don't see why a diorama wouldn't be considered 3D art as long as is meant to be viewed from more than one angle. The question I would ask, as a judge, is how much of the work was done by the entrant.
Buying model kits, lead miniatures, and model railroading materials and painting them up and arranging them in a scene I would score lower than someone who designed and built all of the buildings out of plasticard (or whatever), made his own trees with wire and sculpted (or highly converted) his own miniatures.
On the other hand, I have seen an unconverted miniature painted and entered for 3D art and score very highly (different kingdom). Awesome paint job, but not really within the same scope of other entries.
I guess it just boils down to who is judging (as always).
As for scale, it depends on how much work you want to do. The larger the scale, the more detail becomes a factor. However, it is easier to get premade materials in some specific sizes.
Medieval/Fantasy miniatures come in 3 basic sizes - 15mm, 25mm, and Games Workshop Heroic scale, 30mm.
Model scales that fit these sizes are as follows: 1/60 or 1/65 is about right for 25mm and 1/48 looks good with 30mm. I THINK 1/87 is right for 15mm.
Model railroading scales are as follows: S Scale is 1/64, O Scale is 1/48 and HO Scale is 1/87.
There is a conversion utility online
here that helps.