My campaign has always had a mix of fantasy-sounding names and real-world names. As several posters said, you can have connotations to a real-world name that is difficult to achieve with a made-up one.
It's also interesting to set patterns. For a long time most of my dwarf NPCs had names that were real-world place names starting with "B": Brisbane, Balboa, Basra. I can't really explain why. The players got used to it, and began to recognize "dwarven" names when they heard them.
My own PCs tend to have names that are recognizable but not common in the real world: Orestes Masker, Laertes Dawnpiper. All of the Glimmerfolk that appear in my games (and I invented the Glimmerfolk, so I feel I'm on solid ground here) have names out of Shakespeare: Portia Purple, Dorcas Hand-of-Warmth, Cob Wildborn (and, of course, Laertes). There are a LOT of Shakespearean names, but if I ever run out, I'll probably just turn to other Elizabethan playwrights.
Only once did I ever veto a player's choice of name. One of my early players was playing a young paladin of Asilmar the Sun God. He neamed him "Three-person Greybeard," and refused to answer any questions about the name. For some reason it was just over my limit, and I made up some sort of nickname to call him from there on out.
Panask
Servitar to Baldur