One method would be to use a large sphere for your sky. On one side is day and one side is night (with transitions). Then you rotate the sky slowly. For best results you may want to use 2 different spheres. 1 inner sphere and one outer sphere. The inner is alpha mapped and has cloud on it while the outer is sky colors and the sun/moon. oh and you can dim/change the ambient light based on the time of day.
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