I don't understand that fascination with "you can kill everyone" at all. I mean, that has little to nothing to do with actual roleplaying. It's just fooling around with the systems and you shouldn't expect that you will be able to continue the story as intended after you killed a whole town or so. I think you should definitely be able to fail the main quests and side quests if you make really wrong (and stupid) decisions.
On this I must completely agree. I never got the killing frenzy that seems to befall certain gamers, and in some very story driven games that should be, say, punished. Like not being able to complete a quest anymore or a system of reputation or I dunno. However it's hard to say what is a "killing frenzy" and what is a " mere error", possibly because of the UI or because we were expecting a different result.
The Brotherhood of norD is love, the Brotherhood of norD is life.