That tends to be my definition. Any work of fiction falls under literature to me. What is "literature" if not a well written book? Some books focus on action, some on character development, some on metaphors and deep meanings. Why should any one form of writing receive the title "literature" if the others don't? I know vector isn't saying other types of book can't have any value... but what does it mean for a book to be literature if the quality of the writing has nothing to do with it?
... In my point of view, literature really just means "exceptionally good fiction that people of all walks of life can read and find something in." There is of course different opinions on this, but really... that's it. Fantasy often has the drawback of really freaking bad characterization in favor of Dragonz (I'm talking about stuff like "The Green Unicorn" and the gimmickry of the Xanth series). Plus, there's the barrier of the fantasy universe. Similar thing for sci-fi, historical fiction, and so on.
Meh. I like a lot of books, and you're right--the question of "what makes something Literature" is a difficult one. I feel that usually, it's when an author does everything you said correctly. The setup is interesting. The characters are well-developed. The metaphors are elegant, the frame well-chosen, etc., etc. I don't know why this doesn't happen more in genre fiction, but it doesn't. Maybe it's because well-turned metaphors can get hard to slog through after a while, and often times the "best word" is not one everyone knows... or because an emphasis on the "throbbing member" of the hero is interesting to one audience, and overblown (... teehee) to most.
So have we defined Big-L Literature objectively yet? Maybe I've missed something but so far I'm getting a "From 1800s, ten thousand pages, impossible to read" vibe.
That completely ignores Sartre, John Irving, Faulkner, and Homer, to mention a few... not to forget Exupery and so on. It doesn't need to be 10,000 pages or impossible to read. Gotta admit, though, I was always a sucker for the confusing ones. They're like a puzzle.