I've always felt that often the trek back to your place of death to try again really is punishment enough. Add some extra item degradation due to the death in top of that and you don't really need anything extra.
Back in the early days of WoW, there were always lame arguements going on about how the death penalty wasn't "severe" enough. Since a lot of what I was going to say has already been stated by others, let's instead break down the penalty itself.
- When you die, you take a hit to item durability. If that durability drops too low, you lose all the bonuses from said damaged item, often leaving you NOTICABLY weaker. This nececitates frequent repairs, and when you start getting into blues and purples those repair bills start to add up. With decent gear, a single wipe in an end-game duncgeon can often negate any monetary gain you had coming from being there in the first place. Dying DIRECTLY impacts your in-game wallet.
- Corpse recovery. This was a big one with lots of whining. "Oh, you just have to run back to your body. That's not very hardcore." Look, the penalty here was TIME. You weren't careful, you died, and now you have to run five minutes back to your corpse to spawn in the middle of a field full of hostile enemies with low health, low mana, and the very real chance that whatever kicked your ass in the first place is going to be nearby and ready for Round 2.