Death is tricky.  The penalty should be heavy.  One of the obvious goals of the game is to stay alive.  At the same time, no one who has spent time gaining exp and getting good items is going to want to restart after death.  

I like the idea of a comprimise.  You lose all of your items, and they can be picked up by another (hopefully a fellow guild member who would keep them for you).  You keep your experience, but you are sent to a world of lost souls.  You must battle your way out, but the battles will give you no exp.  The battles should be hard, so the lost souls should probably band together to get out.  It would get real interesting you you were pked, then the person who killed you was offed by one of your guild members.   )   Anyway, once you reach the entrance back to earth(or whatever the planet will be called), you are transported to the \"temple of resurrection\" of your choice, convieniently located in towns and cities.   :]

If you get killed in the place of lost souls, you simply restart and try to get out again.  Maybe there could be multiple starting points, or even multiple worlds where lost souls go.

Just my thoughts.