Finite State Machine for Generating Names One Letter at a Time

I recall taking a class several years ago where I was given an interesting example of a finite state machine in which each state contained a letter and had multiple paths that led to other letters that generally followed them in a word. Some of the letters also had paths that led to a termination as well, and by starting at any point in the finite state machine and following valid paths to a termination, you could chain the letters together and (almost) always end up with a valid word. Of course this was only a subset of the words in the language (which unfortunately I forgot what language the FSM was meant for). My question involves multiple related questions:

• Is this a viable way to randomly generate a "pseudo" word? By that I mean a word that isn't necessarily valid, but one that's spelled in a way that looks valid.
• Is this technique used in, or as part of, any well-known random word generators, and if so, which ones?
• Are there other common alternatives to this that generate a random word one letter at a time, or possibly to take a random string that was generated in this manner and coerce it into a "pseudo" word?

You don't have to answer all of these, just at least one. However, I'll be more likely to accept an answer that addresses all of these in some way.