What a coincidence, I was thinking the _exact_ type of gameplay mechanic 2 years ago! Although I never took it further than jotting down the basic mechanic on notepad and stowing it away :P

It might not be refined but it might help you nonetheless.

Attacks are based on drawing lines on the screen with the left mouse button. Like yours, whichever direction the line follows determines the type of attack. When an attack is performed, there is a specific delay before the attack is performed (say 20-100ms).

Defense would work the same, but with the right mouse button of course. Unlike attacking, defense is easier in terms of which attack lines relate to specific defense lines.

An example: A vertical slash attack (from top to bottom) in varying degrees (say about 30 degrees) can be blocked with a simple straight line. In the players point of view, when the opponent is about to attack, a faint line is drawn on the their screen. This is an approximation of the opponents pending attack. You then have to match the line as quick as possible to be able to perform a block. The accuracy of the 2 lines dictate the amount of damage (the closer the 2 lines look, the less the damage). Looks wise, the game would just perform a associated block animation, regardless of the type of line (so a vertical line does not mean the sword will be vertical, but rather how to two lines relate to a specific set of animations which match the attack).

So to summarize, its not as freeform as it can be, but this might be preferable so that things such as coding and animation are simplified.

For a slightly off the wall way of thinking about it, take a look at the sword-fighting game in Puzzle Pirates (game wiki page for sf). All the things you need to do as a pirate are substituted by puzzling mini-games, and for sword-fighting (and 'rumble', i.e. fist- or blunt-object-fighting) the game is adversarial (i.e. you send attacks to your opponent and vice versa).

It may not be an appropriate way to go with your game idea but it does allow for considerable skill in melees while abstracting away the requirement for exact control and fast reflexes that a direct combat system has. Obviously I'm not suggesting exactly that minigame, but some form of control minigame might be worth thinking about.

Based on what the TS has said so far it seems like the game is a reflex game that requires precise commands to be given at the correct time. I would suggest not to use mouse movement as the way for players to input commands. It will frustrate a player to no end if the game fails to recognize the correct mouse movement the player is trying to input and as a result suffered a hit or misses an attack.

An example, would be Black & White's magic gestures, which is a hit and miss thing.