Mercury News' blog site has an interesting article where several reps from ATI, NVIDIA, Intel, AMD talk about the possibility of that happening, along with comments from the head of Alienware and two game developers (Tim Sweeney of Epic and David Wu of Pseudo Interactive. Here is an excerpt that has a quote from Dave Orton, the CEO of ATI:

I think it is extremely realistic that the CPU and the GPU will be combined on one chip. If you think about the market and how it has moved from the GPU to the integrated graphics chip sets, there are new opportunities. Like the ultramobile PC or MIT's "One Laptop Per Child" project. Power continues to be an issue. There is a huge opportunity in the low end of the market to create a third platform stack to the overall PC platform. So you have integrated chip sets and GPUs. It's a question of when.

The question is if the CPU architecture can do graphics processing. I would agree there is a class of graphics processing that you would want a graphics processor to do. But the question is if there is a system-on-a-chip that could also do that. It will not happen in performance laptops. But think of how many chip sets still use Direct X 7 or Direct X 8 graphics. Those are still shipping. The "One Laptop Per Child" applications. I think there will be a class of problems you can solve with current technology. It might be one generation behind the state of the art graphics."