Death
Death occurs when your Hitpoints reach zero. It's always a good idea to carry food when exploring unfamiliar or dangerous areas.
Upon death, your character will respawn just out front of Anglham Castle, located slightly south of the new player starting point in Middlefern.
Penalties
When you die, you will lose all of your items except for the three most valuable ones. This includes both your worn equipment and your inventory.
Be especially cautious with stackable and IOU items—only a single unit of each stack is counted when determining which items are protected. For example, if you're only carrying a stack of 100 Coins, only three coins will be saved, and the remaining 97 will be lost. This makes stackable items particularly vulnerable on death, even if their total value is high.
However, if you've recently engaged in PvP combat in the Wastelands and are skulled, you will lose everything, regardless of item value.