People often don't realise how much of a powerful tool language is. I'm currently doing a degree in linguistics, so I have a bit of a better idea (but I don't claim to be an expert here) Words are more than just sound and air. They convey meaning, message and emotion. They provoke responses, be they emotional, cognitive or physical. They shape our perceptions of the world. As a result, if you freely use the word "******", a derisive word with negative connotations, you are not only conveying the message that you think it's okay to insult homosexuals to other people. If, in your mind, the concept of "homosexuals" is linked to the word "******", then you are automatically going to start regarding them and treating them negatively because of the negative connotations of "******".
Political Correctness is essentially an attempt to create a judgement-neutral language - one in which you can describe someones skin colour or sexual orientation or whatever, without resorting to words that have been used offensively or derisively. The good thing about the English language is that we have a lot of synonyms, so even if you aren't allowed use one word to describe something, you can use another. It's not until you start running out of 'allowed' words that things get dangerous.
Words are powerful. They are the most dangerous weapon on the planet, used correctly, far more than nuclear arsenals; those who know how to use words know how to convince you of something. Anything. Hitler started out with nothing, but was a great speechmaker. Word control, language control, is thought control. If you cannot link a concept with a word, you soon lose the ability to concieve of that idea. Read Orwell's "Nineteen Eighty Four" - Big Brother heavily edits the dictionary to remove words like "dissent" or "rebellion" in order to prevent the populace from able to form ideas using these concepts.
The idea behind Political Correctness is essentially noble; a world in which everyone can love each other a big huggy bunch and not worry about hate crime and just get on with the business of Being Goddamn Human. However, taken too far it can be quite frightening and totalitarian. But this can be said about anything. The correct approach to PC is, like the correct approach to anything, moderation.