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I'm planning to go for a real dusty look for my IG army. This is as after working on building/demolition sites in urban areas I can tell you that one of the principle elements is the dust which gets everywhere. Principally I need to no how to apply and control the dust especially sealing it. Do I need to varnish the models for this to work? I'm planning on using powdered pastels and any advice would be much appreciated.

*insert line and razorblade joke here*

Well, I've done something similar with burnt up cork to a gundam model before, so the idea should be fairly similar. If you're not going to touch it, I wouldn't worry about clearcoating it, but I'd imagine it will be necessary for game pieces. Otherwise, you'll definetly get finger prints and gunk over time.

I would just use a brush and stipple on a light color as a layer of dust... the alternative sounds too messy.

I made such a dust on my GI . I used MIG pigment with F petrol ( not sure of the name in english- lighter petrol do the same) i laid the pigment mixed with petrol with a brush when it's dry you got a powder effect that quite realistic .but if you sealed it , it 'll darker the shade and no more look as dust.
if you let it like that except if someone rub it it ll keep the powder effect
exemples:

Use white spirit or even water as a medium to carry the pigment. I would think lighter fluid might be a bit too powerful & may take some paint off.
Matt varnish the model first to give a good ground.
Pastels can be applied with a dry brush.
If worked in enough there's not always the need to fix afterwards but would. another coat of matt, or matt over gloss to give a hard-waring gaming finish.
Here's some egs of mine using pastels & tamyia weathering powders. Also have some MIG powders & some MIG pigment fixer but still have to perfect using these.