In normal mode, all items, except for equipment, armour and ammo, are dropped by the player. These items may despawn over time, so you might want to retrieve these items as soon as possible. Upon respawning you regain all health, hunger and energy.
In hardcore mode, the world is deleted upon death. You don't respawn, and instead lose all the work you put into the world, so it will be of your highest interest not to die.
0.9.3 - Added Difficulty