Permadeath works, but the formula is different than for traditional MMOs.
The MMOs I played the longest and enjoyed the most ALL had permadeath.
I've even seen multiple ways for it to succeed!
Option 1: Make leveling and skill gain fairly easy, with death as an expected, natural, and core component of the gameplay. Good for "easy fun" oriented games, and can cut down on griefers if implemented correctly. If you're encouraging an environment of exploration and risk taking, where perma-death means your character is killed, but you enjoyed the process leading up to it, then you wont mind so much creating another one. Competitive play in games of this sort can turn into "marathons" where players compete over who can stay at the top of their game the longest, rather than who can get there the quickest or become the very best, very different from most MMOs. Can also be effective in games where building and creating your character is half the game. (and then, essentially, testing to see if you did it right)
Option 2: Unlock better abilities and newer options by having made notable accomplishments in "past lives". Players who have created characters with long and notable histories, tend to be more responsible and better for the community, and giving them additional powers is good since they are more likely to use them responsibly. Griefers tend to have short lives, and thus would become less effective. At the very least, griefers will want to see the additional content and will at least spend some of their time being "productive" citizens.
Option 3: Make killing hard. This works a lot easier in games where "killing things" is not the most common route to advancement, as "killing things" games tend to be based around killing things being easy. However, if lethal weapons like swords are treasured and hard to come by, but beating people with your fists is fairly easy but only knocks the other player out for 30 seconds, it tends to create a situation where most players who would enjoy pvp are first introduced to and then generally graduate towards preferring the non-lethal approach. Even when they gain the ability to kill others, they are much more discrete about using it, since if they themselves are killed in return they will no longer have said ability. Obviously, there a whole lot of ways you can do this (some very creative!)
Option 4: Have "safe areas", which makes the perma-death aspects more of a choice than a constant overhanging threat. Of course, this has to be balanced by giving a REASON to venture into danger...
Option 5: Allow permadeath, but don't allow pvp and give no benefits to killing other players.