I like this approach - but I also think this requires a lot of care by the DM. See, player's really don't have a clue as to the difficulty of a combat until it's often too late. The myriad small hints and cues of the real world can't make it through the narrow thread of a DM's narrative, so if you want to have the player's run from over-dangerous encounters (or avoid them in the first place), you need some kind of system of informing them about the threat of the opponents (at least, the ones they see or expect to see).
Information gets passed along through gameplay. Running into a combat on the fly just for kicks with no information about what the threat level is like, is usually a bad idea. If the opposition is very overpowered then the damage the party is taking vs the amount they dish out can make the decision easier to make. Anything that can drop a PC in one good hit shouldn't require further evidence. Avoiding confrontations that are not relative to party goals is generally the rule rather than the exception. "The deaths will continue until play improves" is certainly in force in my campaign.
There are pitfalls to avoid in order to keep the players from being misled or trapped:
1) Don't make combat with an overpowered force required activity for the party to achieve quests/goals.
2) Don't place the PC's in situations where they must fight an overpowered force or feel helpless.
3) Do make sure that if really nasty things exist in the area that locals would know about that they pass that info along if the party is smart enough to ask about it.
4) Don't be afraid to let characters die if they insist on making a string of foolish decisions.
For example, in my current campaign the party is still level 1. An adult red dragon has a lair not really that far away from the area the PC's are exploring. The PC's have not heard of this dragon yet and it is not causing major problems to the people of the area. Once the party finds out about this dragon, they have the option of exploring to find its lair.
If the PC's do seek out the dragon and attempt combat, thier chance of survival is close to zero. Assuming events lead to this outcome, I am not at fault as a DM for the TPK. There is a difference between bringing death to the players and having them dig it up from under a rock.
Later in the campaign, a turn of events might bring the party into conflict with the the dragon. At that point the threat will be appropriate for them and the dragon will be remembered by the party as a force in that area.