If you fall in lava you loose everything since anything that drops in lava burns up.
If you get killed by a monster, you drop everything but you have the chance to go back and pick it up.
Thats how it works in SP survival anyway, not sure how SMP will work. It would be nice if you kept your "best" 3 items on death, or at least keep some of your basic tools. I always keep backup tools/weapons in a chest somewhere as I tend to end up getting killed somewhere I can't get back to quickly.