WoW's death mechanic was pretty similar to this but you spawned as a ghost so you wouldn't get ganked or killed on your way back to your corpse. That doesn't stop you from getting corpse camped by either other players or mobs, however.
Bashiok divulged some information on as to what death mechanic Diablo III is using in the current development build :
Official Blizzard Quote:
Before I get in to what we are doing let me go over some things we want to avoid with a death mechanic. We want to separate being in town and being out on a quest/adventure/dungeon as much as possible. Leaving the safety of a town should not be a decision you take lightly. We don't want to remove the sense of suspense and danger by making town something you're always going back to pretty much whenever you like.
The intent is to create a greater separation from being in town, and not, and to make your time away from town a lot more tense.
On that same note we also don't want to remove the player from the action. Throwing them back to town for every death really breaks up the action, and not in a fun, interesting, or necessary way.
So, with these things in mind we've found that a check point system works really well. Throughout your adventures, and generally at the ends of each "floor" of a dungeon your character is saved to a checkpoint. When you die you're dropped back at the last checkpoint with a small amount of health, and the rest regenerates slowly. It's obviously a very forgiving system as it is. It's just too early to put a ton of thought in to what penalties there should be, if any, added on top of it.
Regardless, potential penalties aside, this is the death mechanic we're currently using and it's working really well so far.
How do you feel about the checkpoint system? It does make the gameplay go a lot more smoothly, but does it make the gameplay less challenging?
(After some investigation, it was found that this citation was based on a very old news topic, viewable here, although the base source no longer exists or cannot be found.)