It's an interesting idea, but I think you'd have one hell of a time actually getting people to play it. My knee-jerk reaction was "a game where I get weaker as I progress? No thank you." Granted, after I thought about it, the idea got more appealing. But the truth is that most people just go off their first reaction and use that as their basis for overall reaction. While some will take the time to think "hey, that might be cool," most will say "F%&# that."
I always thought a good idea might be progressive challenges. I know that in most tabletop rpg's, the hallmark of the concept is that challenges escalate based on the party's strength level, assuming the game master knows what he's doing. And in several, the escalation is actually exponential, where a level 20 opponent is not 20x as strong as a level 1, but rather somewhere around 50 to 75x as strong. Scaling opponent strengths (similar to oblivion, but actually thought out and comprehensive) would create more challenge, I think, and still give the sense of accomplishment via leveling.
But, then...you are talking about an MMO, in general, so my concept is automatically thrown out. They thrive on static challenges.