Also, one doesn't have to accept the final 1/3 as "real" to accept the other portion as diegetic dream. I think Lynch in both LH and MH is playing with filmic reality as artifice, where multiple characters become one, like that of an author's. The "reality" segment is still created within a film.
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Dave Fiore:

Paul! I love Lost Highway too (although it's been a long time since I've seen it and the bastards won't put it out on DVD...I don't have a VCR anymore...) The difference between the earlier film and Mulholland Dr., for me, is that, in the first, we only get the horror of alienation, so to speak... in the second, we certainly get that, but, more importantly, we get the horror of an--almost--perfect communion too!

If LH asks:"why are you dreaming this dream?", MD asks: "how could you possibly dream anything else?"
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Charles Reece:

I actually think there's quite a few similarities between Lynch and Lang: a concern with destiny and desire, where destiny isn't merely given to us by a god, but constructed on a reality of desire. Lynch also loves to put into his films destiny figures: the Good Witch, the Blue-Haired Lady/maybe the Crazy Bum, the mechanical bird, the Mystery Man.

Welp, I watched it again and took some notes. One interesting factor in this that's not been commented on as far as I've read is how much Lynch borrows from his previous films:

1. Rita wandering around, blood trickling from her hairline after a car wreck, cf. WILD AT HEART.
2. Mr. Roque (pronounced 'Rook' as in chess), controlling things from a curtained room, cf. TWIN PEAKS (including chess reference).
3. The Cowboy with a too-big white hat, cf. THE COWBOY AND THE FRENCHMAN.
4. Shifting identities has been the one parallel most noticed, cf. LOST HIGHWAY.
5. What should've been the most obvious, but I don't think anyone has: Rebeka del Rio singing Roy Orbison to a tape (funnily enough, of Rebeka del Rio singing Roy Orbison), cf. BLUE VELVET.

Maybe people want to make something out of 1 and 3, but I'd suggest Lynch loves car wrecks and silly cowboys, the grotesque (see his art of rotting animals) and cheap Americana (see just about any of his stuff). The interesting thing about 2 is that not even Martha Nochimson, who spends a lot of page space on the meaning of the curtained room, as a place of transcendence or where reality becomes possible, has anything to say about why a funny controlling agent who looks quite a bit like a homunculus would be sitting in one of Lynch's favorite rooms. Mr. Roque is the agent of destiny in Diane's dream, controlling Adam, telling him who is "the girl". But he's a construct built on Diane's desire and won't be seen again in the final 3rd. Why is that, if the last 3rd doesn't serve as some basis for the first 2/3's? Mr. Roque's not in control, he's a chess piece. But, just like in TWIN PEAKS, the game isn't what it seems.