It is certainly possible (if challenging to implement -- I have never worked with MMF), but I think it would be impractical for many existing levels. A typical level does not attempt continuity between adjacent screens, especially if they cannot be traveled between directly, and in some cases even if they can. The jarring graphical transitions would degrade the quality of the experience. Modifying the scrolling mechanics with special objects or world.ini notation could be confusing (for example, jumping in one place would not cause any scrolling, but a few squares over it would) and would draw attention to lack of continuity or hidden rooms.
Most levels would have to be modified in places just for smoothness and playability. Many screens are surrounded by unreachable void areas that, presumably, should be shown the player is near to the edges of those screens. Although the program could simply stop scrolling upon reaching a void, it would again draw attention to the limits of the world (and what about those few surreal levels that rely on players passing through void screens?). Ambiance changes would be more noticeable if they were not paired with screen changes, though perhaps two neighboring ambiances could be blended together (which poses problems for levels using ambiance as looping music). Some designers use screen changes to incorporate surprise into their levels, which could be lessened by scrolling (and, again, blocking scrolling would signify that a surprise was coming, which is a paradox). Parts of some screens could also become impossible to see. For example, if a screen only had low ground and yet had important puzzle information at the top, the puzzle could be rendered insolvable.
There could also be issues with warping and shifting. Imagine five screens in such a configuration:
_1_
234
5
Let's say screen 2 has an exit on the right and screen 4 has one on the left, but while the exit in screen 2 simply leads to screen 3, the exit on screen 4 warps to screen 5. If you are at the bottom of screen 1, what should be displayed below you? This is, admittedly, an obscure case, but with the convoluted shifting/warping of many levels available, I have no doubt issues would arise, and using the scroll blocking technique suggested would indicate that the world is not actually linear, a fact that level designers often try to conceal.
Finally, it is important to note that Knytt Stories does not keep track of any other screen than the one you are in. This is why creatures instantly reset when you leave a screen and reenter or shift to an otherwise identical screen. Besides adding to the amount that the program must keep track of at any one time, it would have to be determined when to release such information -- should it act on individual objects or entire screens, and should it happen immediately when they are out of view or at some arbitrary distance? The exact manner would influence designers' choices.
However, all of that said, I think that levels specifically designed for the mod, with these caveats kept in mind, would definitely be excellent and highly entertaining, and it would be awesome to see such a mod developed. In fact, in finding all the issues present in existing levels, I have imagined an exquisite scrolling level that would take complete advantage of the new gameplay aspects that would be introduced. Perhaps someone will someday take on the project.