Starchaser:
You see, to my mind there is the potential for the horror to be dilated when the author is mentioned. As an example if the investigators come across a group of cultists chanting 'Ia Yog Sothoth', one of them may say "Hey didn't I read about Yog Sothoth in a book somewhere? That's right, it was a horror story." (cue everyone running off to get a copy of Lovecraft's work).
Presuming you mean 'diluted' there...I'd say there's nothing in the scenario that makes it less horrific: an Investigator who's actually read the books relaxes, saying "Don't worry guys, this is a LARP, there's nothing to-" and
then you drop a shoggoth on them (or, in a darker game, play it as though the talky Investigator could be right and allow them to let the "LARPers" drag their victim to the altar and do nothing because it's all pretend...until the knife comes down and oh
no you're all witnesses to murder, in here with a bunch of murderers. oops). Even terrible monsters from terrible films are probably not something you'd want to run into in real life, and Lovecraft's works are a lot less detailed than the rulebooks, so honestly wouldn't be any practical help.
I don't do Modern, but in general I make the Mythos more mysterious and horrific via flipping the viewpoint rather than leaving it swept under the rug: same thing, same stats, but
not using the answers provided from the POV of a virulent racist. Answer the questions brought up by the stories in a new way: e.g.
Q: why do Deep Ones want intermarriage, if they're not trying to outbreed the "pure stock"?
A: There is an apocalypse on the horizon they can pick up with their inhuman-science-based predictions/is part of their religion, and they're trying to save the families of those allied to them. Also, they
hate non-allied humans because of the raids on Innsmouth, which're pretty much yesterday to immortal minds. Instead of something that wants to hurt you because it is Not Like Us, you get something that has good (if tragic) reason to want you to suffer like a hybrid locked in an asylum would suffer, i.e. a
lot. You still can't reason with it, but that's not because it's a brute, but because you never had the chance to learn that language, and your ancestors broke the trust of those that could so badly they can't be reached. A single Deep One is no longer the monster buddy of some cultists, it is living, breathing Vengeance called up to defend the faithful.
Other questions: Why are Mi-Go so secretive and unwilling to let contacts loose in the wild, if they're not illuminati? If reverse evoloution isn't a thing, what on earth (or off it) did
that to the de la Poers? What
is the most compelling attraction in joining a Mythos cult, even if that means murder, if people of poor/nonspecific ethnic background aren't Just Like That? Why does Ithaca demand "brides" if he(?) has a basic grasp of relative scale and biology?
If you have those answers as your game's canon while the investigators try to follow dear Uncle Lovecraft's opus uncritically like a handbook, they'll misstep, get lost, and get themselves into terrible situations that make you look clever because they assumed Motive A was important when in fact it's almost irrelevant. Ironically, the way to make Lovecraftian fiction more Lovecraftian - incomprehensable and sanity-threatening to the mere mortals caught up in it - is to knock out the framework for comprehending it set up by Lovecraft.