I think if we were actually at war, people may feel differently. As Kos mentioned though, these tags have appeared way before this "great war" we keep hearing about. That alone causes problems - why a shift with ingame mechanics, with no ingame plotline or evidence to support it? If I'm at war, shouldn't my borders be closed? Shouldn't the guards be dropping the opposing faction on sight, regardless of some tag being on/off? And why the hell is Yrkanis doing the rounds in both friendly and unfriendly territory? Surely if we are at war, we should have the chance to nuke the king when he visits Zora?
Faction-based PvP is very difficult to balance, and even more difficult to justify - especially if you take a mild RP angle. Meh, I have to use the W word again... Ah well, it's just an example

In Warcraft, the two factions have very clear attitudes towards each other. After a war, then peace, then another war, etc. - they are now at war again. WoW has used this scenario since it's beginning (taken from Frozen Throne I think - not really a fan), so there is reason (RP or otherwise) to ask the question "Why am I opposing the humans?". It's right there, in the storyline, and it's unavoidable. On Atys, we have the past events up to the great swarming, and then the game started with all Civ's being led to safety. Still not big friends, but they get along at least.
During the early time of Ryzom release, everyone played together (regardless of faction or Civ) and had a lot of fun. There were cross-civ guilds, cross-faction guilds, all sorts. Then we hit fame, things became a little more difficult - cross-faction guilds were a problem, for example. Even so, fame was just numbers - people still played together, with whoever they liked. And they still had fun.
Now here we are - no war going on at present, but everyone has taken sides. People generally only grouping with their own faction, auctions that are 'kami/karavan' only. People who never even bother with PvP being nuked whilst digging. This is not the way for a small community to go, and thinking it may pull the community apart entirely is not so far-fetched. PvP IS the reason a lot of people left, be it the implementation of the PvP, the attitudes being formed because of it, or the steady stream of playground arguments on the forum concerning kill-on-sight lists and other such rubbish.