Full loot is the heart of Mortal Online, there are no safe zones in MO. You should always be ready to fight for your life or lose all of the items in your inventory.
What is following is coming from the Beta. The lootbags are actually placeholders.
Full loot means that whenever a player dies, everything in their inventory is dropped on the spot where they were killed. Anyone may then pick up any of the items that were dropped. The items will appear in a loot bag that can be clicked on by anyone, this will open a screen which will let other players view all of the lootable items. They may then select the items to place in there inventory.
The only way to recover the dropped items is to resurrect your self and then run back to the spot where you were killed and hope that the items have not been looted by another player.
The loot bag does not stay on the ground indefinitely, it will eventually disappear along with everything in it.