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I doubt this will dilute the effectiveness of the keyword - what I would be more concerned about is a potential ranking penalty. I have seen this technique used in the past but hardly ever see it being effective these days.

I would stick to crafting well crafted titles designed for the user in mind - keeping your keywords first in the title.

Best option is to have top level domains e.g. .co.uk and .com.au with unique content on each and host the sites in each country.

With this approach, its easier to get local links, usually requires less links to rank each site plus you get higher click-through rates from the serps.

If you use directories /uk/ and /au/ case does not matter - my pref would be to use lowercase urls

Note: AU has restrictions on domain registrations (have to be an AU business) but you can get someone to register on your behalf.

Yes this will help a bit - will also give your users a faster responding website