How about we split the difference? There are some things that training and skill get you automatically as you level up. Fighters can forge their own magic weapons and armor with a few properties. Wizards can weave their own spells with a few properties. It's a small list, but enough for some iconic basic abilities (magic missile and adamantine axes and mithral chain shirts, forex). These are "common" items or "minor" spells.
Then, there is a bigger list of "rare" items and "uncommon" spells that do all sorts of weirdness. Perhaps that's where we situate things like Vorpal Swords and the Finger of Death spell. These are not things that anyone just gets, they are things that the DM can award, for exceptional success, or for quest rewards. These things might be things you can use, or not; they might be powerful, or cursed. The might not work right at certain times, and you might loose them.
Likewise, clerics gain "simple" blessings through leveling up (cure wounds, healing potions, whatnot), and are awarded "divine" blessings as treasure (divination, planar travel, etc.). Thieves get items, too -- light weapons and light armor, but also cloaks, boots, goggles, etc.
I like this idea if the distinction between character abilities and magic items is made on something more than flavor. This is in some ways backing away from your idea, but I think there is a place for game concepts having clear boundaries. For example, you might distinguish this way in 4E terms:
A. Character powers are always at-will or encounter abilities (or always on, to the extent that you want to include feats, skills, and miscellaneous class abilities in this discussion). These are carefully balanced, per 4E mix. Critically, if you've got a piece of gear that is included in the balance calculation, then its base character abilities counts here.
A fighter has got a weapon or three, and his balanced ability to use that is in his class description, not the item itself. Away from simulation and gamist concerns, into the narrative realm, such a weapon is like a Champions power bought without any or much "focus" limitations. Meaning, while it is conceptually possible that the fighter will be sometimes without his equipment, in the narrative this rarely happens. Even if locked up, stripped of everything, and so forth--when he breaks out, he'll be able to get ahold of something that lets him unlock those weapon abilities--even if only a makeshift club from an old bone.
B. Equipment powers are always daily or less frequent (on average)--by session, by adventure, by week, a small, finite set of charges, sometimes even used once and drained. These are
not balanced with the classes, though of course they have their own internal balances against each other. That is, you should expect a level 10 item to be clearly better than a level 5 item, and three level 10 items to be roughly in the same ballpark over the course of many games. But a given level 10 item in the hands of the right character at the right time may be almost worthless or very powerful or anything in between.
This part is meant to be useful one of three ways--not at the same time, but more or less equally depending upon the style of the campaign and how well the DM controls it:
1. The items get handed out fairly evenly (or players procure them with even resources), and the DM makes an effort to see that the synergies roughly balance out. This is closest to the current 4E model.
2. The items get handed out on a simulation model, based on what NPCs would have, what old treasure troves would have, etc. They may be fairly rare or almost Monty Haul, and they primarily exist to let players try crazy stuff outside the careful balance of their character abilities.
3. The items get handed out on a gamist model, where the main point is that they are somewhat limited resources that need to be fully used to overcome the challenges--not unlike the 1st ed. AD&D assumptions of the dungeon crawl.
Naturally, there can be many different blendings of those ideas, but whatever blend is chosen, has to be enforced by the DM. (For example, if he wants a sim/gamist hybrid, he has to contrive the sim such that the natural treasure retrieved from it stays within the gamist parameters that the group wants.)
Of course, a flaming sword, as an object, can sit on both sides of the boundary, but even then, the boundaries need to be clear. The oft-discussed moving of +N off the weapon to an inherent bonus, while leaving some flaming special ability on the sword, is one such way. The sword still functions as the "sword object" that lets the character use his weapon abilities, just as well as a mundane longsword off the rack would do.
Where this ties into Kamikazis' idea, however, is that we move the boundary even further. The +N comes off and goes to the character. But also, the "flaming" property that lets the sword do fire damage comes off and goes to the character, because it is at will. Or, if you don't like that, then it has charges and stays on the item. The item itself may still have a 1/day special.
In this method, items can enhance character abilities, but strictly speaking, not the other way around. (The character that can cause swords to burst into flame and turn their damage into flame damage is not enhancing the ability of a given magic sword. He can do that with any sword.) You can have items that turn character abilities into something more powerful. So instead of the mage having "burning hands" encounter power and "fireball" daily power, he has "burning hands" encounter power and can find items that let him throw the flame in his hands and have it explode for more damage. There would be other items that do different things, like create a "wall of fire". These items are useless to anyone that can't produce the flame in the first place.
