On the subject of what makes an RPG into an RPG: I feel that there are two main things that, if one or the other is there (preferably both) the game can be considered an RPG. These things would be customizing and developing a character's power/skills in a way other than gear, and developing a personality for your character.
Diablo and Diablo 2 do have non-item power growths, and though admittedly it was probably under 1% of the population who actually tried to develop a personality for their character and stuck with it, you very well COULD do so with the way you chat with friends and random other people you played with online.
Developing a personality for your character seems to be the prevailing definition for 'RPG' in this thread, and I agree that a game that allows for personality development truly deserves the title of RPG. The problem is that common usage and the English language being what they are, RPG has also come to mean any game where the character grows in power.
On the subject of realistic item drops: One ActionRPG (like Diablo, as opposed to TrueRPGs) that I sometimes play called Titan Quest actually has a somewhat realistic loot system. Pretty much anything can be in a chest, but you're not getting (for example) any sort of Bow to drop from something obviously using a Sword no matter how high level or powerful the monster is. Also, if the monster is the Minotaur Lord at the bottom of the Minoan Labyrinth, you can't expect it to have any caster robes on it. (though it quite possibly would have some in its associated treasure chests)
On the subject of having non-lethal conflict resolutions: I agree that avoiding fights should not always make the game harder, and can prove to add more points of interest to the same amount of conflicts. The biggest problem with conflicts being resolved by anything other than killing the critter or disabling it in a scripted manner mandated as the ONLY possible method is that no game-designer can ever think of every possible way a player would want to solve it.
Take the ever-popular 'Cult of evil wizards want to summon a demon, and will neither take nor accept quarter from what they see as a lesser being'. Standard course of most 'RPGs' would be to slaughter them all.
- What if you're an evil character who WANTS the world to suffer, can you not prove your loyalty to the destruction of the world?
What if you believe there is good in even the most evil-hearted, can you not subdue them, somehow restrict their magics (in Dungeons and Dragons, for example, you'd just need to tie them up, take away their spell components, and gag them properly) and attempt to convince them of the errors of their ways?
If you do decide to just slaughter them all, if their friends and enthusiasts ever find out one would think you'd be likely to have hordes of madmen and madwomen attempting to avenge their brethren.
Most RPGs just leave it at 'You kill the evil wizards, collect your reward from whatever leader is left, and go on about your life.' Even some ones where being of an evil alignment is actually supposed to be an option, like Neverwinter Nights 1 or Knights of the Old Republic 2. Sure, in either of those you can slaughter the innocent within limits, but you're still limited to either defeating a great evil or abandoning the game before the end.
What I'd love to see is the ability to enter any action you wanted to, and have the game respond accordingly, but I understand that that is only possible in simple games like the various text-based Zork games where most of the responses to 'I want to do X' are 'I do not know how to do X' and the rest are highly scripted. The best we can hope for is a sort of open beta stage where all sorts of players can come in and lend ideas for new options they'd like to see.
Oh, and I can highly recommend both Planescape: Torment and Divine Divinity. Their graphics are poor by today's standards, but if gameplay is what you want, go for it. Both are quite advanced for the times they were released, and contain far more 'Roleplay' and 'Moral Choices' than most everything else released later. (especially PS:T) A note is that PS:T is party-based even though the Nameless One is the only one you control the speech of directly. (other party members' non-combat actions can be influenced with diplomatic tactics) <img src="/ubbthreads/images/graemlins/div.gif" alt="" /> is entirely a one-PC adventure.