I was reading some old thread from 2000 about Tony and Mark hanging out with Hugo and getting a preview of the MKII player.

That was Mike Comb, not Mark.

With a screen that can do that many levels of dimming, couldn't more shades of grey be available?

The shades of gray are done by time dithering. And yes, more shades of gray are available, they are just too flickery for static text and image screens. The two shades chosen for the static graphics are the only two that aren't too flickery.

You will notice that some of the visuals use time dithering to produce more shades of gray than are available for static graphics. These work because the images are already moving on the screen and the flicker isn't as noticeable in those cases.