Some of my favorite games of all time are Ultima Underworld I and II. I liked lot's of things about these games, one of which is how nearly everything was interactive, items can be picked up and dragged into your inventory, you can drag items out of your inventory and drop them in the world. Items can be used on other items by dragging them on top of another. I liked creating treasure rooms where I could arrange my stuff however I liked. Some games since have attempted the same thing, in particular the System Shock and Elder Scrolls Series of games, of which I am also a fan.

However it seems that now days the mouse is reserved for which direction the the character camera faces. Back in the old days of UUW there wasn't much reason to have so much control over the looking (although they did let you use the keys 1,2, and 3 for looking up, looking ahead, and looking down).

I have seen only a few modern games that have attempted to combine the mouse look and the drag and drop inventory. Arc Fatalis was in about the same spirit as the underworld games, and you were able to drag and drop items to your inventory at the bottom of the screen. However you needed to press a key to 'switch' between two modes where the mouse looked around, or was used as your hand and interacting with the environment. The same attempt was used in an indie game called Delver that I found on the web (It is supposed to be a combination of a rogue-like with an Ultima Underworld style exploration game).

I am wondering if anyone has seen any system that has managed to seemlessly combine the ability to mouse look with the ability to drag and drop items or other things in the environment. Something I found interesting was a mechanic shown to me from my brother in a game he loves called Red Orchestra 2. It looked like the weapon you weilded didn't automatically aim at the center of the screen, instead moving the mouse also moved how the character was aiming the weapon, yet mouse look was also on at the same time.

In one of the game designs I've been working on my ideal control mechanism would allow mouse look, the ability to aim weapons without changing the camera, and the ability to drag and drop items, all at the same time without a changing of state. I am however stumped. I've been toying with a prototype in unity where the camera rotates when the cursor approaches the edges of the screen (Similar to how Wii shooters work), but I have always gotten complaints that it feels unresponsive and slow from those that have tested it. I think the mouse look is just the mechanic that is expected to be in all first person games today.

It's been a while since I played it, but Mount and Blade had both the camera and your weapon follow the mouse in an interesting way. I think it may have been dependent on your settings too, but I specifically remember the challenge (the good kind, not the "I can't stand this game mechanic" kind) of balancing where you swung your sword with where you were looking. It doesn't have anything to do with the inventory system/moving items around (that was all menu-based) but perhaps that might give you some ideas.
Otherwise, perhaps you could have the camera sit still while the cursor is within a small area on the screen, but start to move as it leaves that area. I'm not sure exactly how that would look since I've never seen it implemented before and never thought about it until now, but that might remove the "unresponsiveness" that I found very annoying in Wii shooters since it would start to rotate shortly after you moved the cursor, rather than at the edge of the screen. Maybe have the camera rotation speed up as the cursor moves further from the centre, and slow to 0 when it's within x distance from the centre.

The World of Warcraft approach, which I presume is now adopted by lots of other games: use mouse normally for pointing, but use it for mouselook as long as a specific button is held down. In WoW, that button was the right mouse button (and I think it couldn't be configured either). A bit unelegant and artificial, IMO, but works. Some other game could reverse the order of those functions, make the order an option, and/or use a toggle instead of pressed down key. I would personally prefer to have mouselook as primary in most games.

The above system could be made more natural through context: mouse quicklooks, unless you have an inventory/menu open, in which case mouse controls cursor exactly as long as the menu is open. Would suit most games. You could aim at an object while quicklooking, and pick it up with a keypress, which would simultaneously open the menu; closing the menu (with esc, clicking outside it or whatever) would resume quicklooking.

Depends on the game whether you need looking up and down, strafing movement, etc. If a game doesn't have rapid action/positioning, but has lots of manipulation of things, I think it would potentially be fine with keyboard-only looking and movement, with mouse used for manipulation only.

Fun possible solution. I just contributed to the Oculus Rift Development kit on Kickstarter.

Some of my favorite games of all time are Ultima Underworld I and II. I liked lot's of things about these games, one of which is how nearly everything was interactive, items can be picked up and dragged into your inventory, you can drag items out of your inventory and drop them in the world. Items can be used on other items by dragging them on top of another. I liked creating treasure rooms where I could arrange my stuff however I liked. Some games since have attempted the same thing, in particular the System Shock and Elder Scrolls Series of games, of which I am also a fan.

However it seems that now days the mouse is reserved for which direction the the character camera faces. Back in the old days of UUW there wasn't much reason to have so much control over the looking (although they did let you use the keys 1,2, and 3 for looking up, looking ahead, and looking down).

For an RPG, particularly an MMO one, I think that this another solid point on why a fixed third person camera for an angled top down like Ultima Online(but all actual 3d). Focus on the world around the character and remove the need for mouse look at the same time. Also returns the usability of chat bubbles which helps place the person you are talking to within context if they are on screen.