UO was divided into Trammel (safe from PvP) and Felucca (not), and some servers only had Fel. Originally, there was only Fel, and Trammel was made to entice more players who might not want such a cutthroat environment.
In Fel as soon as you left a city you were more or less fair game to die from an extremely hostile environment. PC Gamer (If I recall) described the learning curve of UO as "A frozen wall of acid." Brutal, but very exciting. A wild west MMO.
(In Fel) UO was a rare RPG where anyone could kill anyone, for any reason, but with the repercussion that they would be branded a "Bad person" (visible with a gray or red name instead of blue). Stealing from good people corpses also did this. Anyone can attack and kill bad persons, and if you killed even more people you were a murderer and it took a very long time to return to normal.
This Blue/Gray/Red name system created a sort of cautiousness among travelers. Being near a pack of "blue" people might be safe, since any person that tried to steal or kill would turn gray and they'd immediately kill him.
Unless of course, all those blue-named people were conspiring, and you are the target.
You want to use super awesome powerful gear? None of this sissy MMO stuff. Die and you lose it, and your enemy (or his enemy!) gets the spoils. An insurance system was added later (2005ish?) where you could pay a certain amount per item to not lose it, probably also as an attempt to make the game less harsh.
The problem I have with a lot of MMOs is that the power of your character is simply how much time you sink into the game. Essentially, MMOs are games that reward wasting time.
UO had so much more than that. UO was a game where treachery and sneakiness really paid off, if you wanted them to. Lots of ways to nearly instantly kill or entrap people lead to a lot of very exciting plots where guilds might be laden with spies. Absolutely nothing like the ridiculously limited PvP found in games like WoW.
In a lot of ways it was the Diplomacy (diplomatic back-stabbing board game) of MMOs. And it was great.
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For more also see outworlder's excellent comment in the Nomic thread: http://news.ycombinator.com/item?id=4890513
The criticisms of UO wiki page is also a very good read, especially the housing and economy sections: http://en.wikipedia.org/wiki/Criticism_of_Ultima_Online