In a documentary about German history "Die Deutschen", historian Gerd Althoff mentions that during an assembly in Regensburg Otto I caused a stir by speaking in his Saxon dialect which apparently was seen as unusual by the other attending lords.
A couple of questions concerning that:
How do we know that? Did some chronicler find it important to comment on the attendees' dialects or was it maybe an enemy of Otto who meant to ridicule him this way?
Was it that unusual anyway? Regensburg was in Bavaria but lords from all of the East Frankish kingdom would be gathered together who (as I suppose) all spoke very different dialects or even languages. Wouldn't they have been used to Saxons (considering that Otto was the second Saxon on the Throne after his father Henry) or was this dialect especially different to other German dialects at the time?
I have been under the impression that at such an assembly you would have spoken latin anyway since you can't expect everybody to speak your German dialect. There might have been Italian nobles or even the pope among the attendees. How do I have to imagine the nobles from different regions of Europe directly addressing each other? Or did they have interpreters with them?
I can only speak to this question with respect to medieval Germanic philology, but that I will address.
Old Saxon was very substantially different from the Old High German dialects, yes. Not with all other Germanic dialects, though. At this point in history, Old Saxon mutual intelligibility with some Old Low Franconian dialects (which were to become Dutch) is thought to have been very good, due to long term language contact, sharing, as they did, the Low Countries. But even this was not a universal, as Old Saxon (which is generally considered to have been ultimately Ingvaeonic) and Old Low Franconian (whose Franconian branch occupies its own West Germanic phylum) are not closely related, phylogenetically, within Germanic - only, rather, geographically. They simply developed an understanding (and certain shared features) over time. And only in certain regions.
In any case though, both were quite distinct from Old High German (whence the dialects of modern Germany, excepting Low Saxon), which interacted with Old Franconian, but never achieved any sort of dialect continuum with it.
This all having said, we have evidence for Germanics muddling through the business of communication even in distantly related Germanic languages, via England. Evidence of language contact and successful communication between the Anglo-Saxons and the Scandinavians of Danish York is abundant. And North Germanic much more so differs from Anglo-Frisian than does High German from Franconian. Nonetheless, such communication would have been a tricky business indeed.