Seen it before on Mabinogi. It was even worse there, since there's a lot of actions that you require NPCs for, such as repairing equipment (which can break pretty rapidly), so when all the NPCs were dead (it wasn't just a city or two, it was almost every non-fightable NPC) the game pretty much came to a halt. Did I mention that many dungeon entrances were classified as NPCs and thus couldn't be used? Also this went on for multiple days.
Thankfully some guy released a hack that let you still talk to dead NPCs so you could still repair/shop and do story quests (though you still couldn't sacrifice items to certain dungeon entrances).
http://i46.tinypic.com/xfb23q.jpg
http://i48.tinypic.com/s49x1v.jpg
NPCs without a proper death pose were... uh...
http://i46.tinypic.com/2ev8b3o.jpg