You might consider carving the wood with the appropriate chisels.
Serife fonts work very well with a V-shaped chisel. And the process
might leave some desirable marks / traces if you're looking for a bit
of a retro look.

As for the router approach, obviously a V-shaped bit that will alow
you to go into corners.
Best fitted on a Dremel tool for that size of lettering, if you own
one that also has this sort of attachement:
http://www.dremel.com/en-us/attachme...=69679&I=69795
Then a flat-head bit to clear larger surfaces, if needed (endmill or
something similar).

Oh, and you might want to make a shallow cut along the edges with a
sharp knife first, regardless of the process you choose.