For less than a bazillion dollars, you could replace the mulch with a pea gravel. Just be sure to prep the area correctly first. You may be able to find a gravel that will complement the color of your existing patio.
Then put a wood bench (with back or without) along each of the two sides of the wall with a large potted plant between them where the wall makes its turn.

For more $ have a bench custom made to hug the entire wall. For more $$ have a stone bench built that matches the existing stone.

I would either continue the pavers on that mulch area OR I would built a wood deck over it to match with the wood steps coming out of the house.

What a beautiful outdoor space! I would look into continuing the pavers into that space.

I like the built in bench idea.

We used gravel and like it. We use it because our area is very wet all the time. So we built a deck above some of the mud and covered the rest with gravel.

I think it gives you the chance to set up two different functional areas -- right now you have eating, but you don't really have couches or chairs for just sitting and chatting, so you could have a zone for that. (I'm agnostic about which function goes where, although the bench idea might be a way to jump-start the seating area, if you add a couple of arm chairs, and it's already shaded.) Alternatively, if there are kids around, their picnic table and other things can go in the mulch area, where spills will sort of disappear, and the other area can span adult eating and hanging out functions.

Here are some pics that might help you brainstorm the possibilities...

agree with above continue pavers or add decking tie in to what you have coming out the door... you could have a large dining area and a nice seating area since you seem to have many people you entertain...

Thanks for the feedback (and compliments) so far, keep it coming! It's come a long way since we moved in 4-ish years ago, and other than excavation work has been entirely DIY:

The paver patio stops where it does for a couple reasons:

• I was worried that doing everything with the pavers would make it feel like a parking lot. I knew I wanted to sort of divide the space and do something different over there to break it up visually, but (obvisouly) I'm struggling with what.
• The edge of the "grill recess" along the house made a convenient transition point.
• Budget. It would have added another ~300 square feet (or about 40%) to a project that was already getting expensive (even going the DIY route).

Extending the patio now would be tough. The soil there is heavily compacted clay (like driven on with a Bobcat-hard). I don't think I've got it in me to hand-dig it out, and I'd worry about driving even a small excavator over a patio which is built to pedestrian specification.

I've toyed with "stepping up" the patio about 6" (using matching retaining wall blocks). That would create a visual break as well as require far less excavation than continuing at the same grade.

I think we'd probably keep the "dining" area where it is, at least for daily use. It's less of a walk carrying food, and you've got a great vantage point to watch the kids run around. I guess for larger gatherings the table could be moved into the new space to allow more elbow room on the patio.

I love the fire pit idea acm..... you continue on with the pavers and put a free standing fireplace or a built in with seating around....

Free standing large round with seating would be beautiful.

To expand on what I was picturing for the "terraced seating" concept, here are some pictures I've collected. Pretty much "bench seating" as has been suggested, with some different proportions.

I figured firepits would be a popular suggestion. A nice big round one placed concentric with the curve in the retaining wall would look really nice. I worry it'd be getting a little close to the house (not sure if there is guidelines about that?), and I'm not sure how often we'd actually use it, particularly at an age/stage of life where there are toddlers everywhere.

I work in a metal design/manufacturing field, so designing and building custom bench frames for curves isn't scary or cost prohibitive.

I think the decking would look nice you could add a step up and put a lot of comfy seating for people to converse with a raised fire pit with cover....