I suspect using two passports (dual nationalities) with different names is either illegal or at least frowned on if they are used to say, enter and leave the Schengen area with one passport, then turn around and re-enter with a different passport. Has anyone ever heard of such a situation? Does anyone know how legal/illegal it may be?
It's very illegal: the rules about immigration are tied to individuals, not to their passports.
As to the chances of being caught, I wouldn't know for certain. I suspect though that SIS (the central database in which migration data is stored) would find you out, since your data afaik is being stored as a combination of names, document numbers, date of birth and possibly even photograph.
I wouldn't try, because you face penalties, being sent back at your own expense and registration as a visa offender on both passports. There is even a remote possibility that such violations are a ground for one of your home countries to annull your citizenship: some legislations allow this in case of 'nationality abuse'.
In addition, unless both your nationalities are in countries that are exempt from visa application, you would be caught before even getting in. That is, suppose you were to apply for a tourist visa as national from country B while being in the Schengen area as a national from country A. If you were to go to a consulate of country B, they would want to know on what ground you are currently in the Schengen area; and they would refuse to issue another visa.
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