Dropping an item amounts to destroying it (you can't pick it up again). The only exception is that, in a dwelling, you are storing what you drop.
If an item can't be dropped, often also can't be sold in a shop.
If you thought we were talking about items randomly received after a combat, that's called loot.
Certain items (mostly quest items) are added to your inventory already marked as undroppable.
- You can't change their status. They can never be stored, sold or dropped.
- They have no encumbrance
From June 2011, you can mark your Droppable Items as "Non-Droppable".
- While Non-Droppable, they can't be sold, dropped or stored
- You can change their status to Droppable and back as often as you like.
- Their encumbrance doesn't change.
It's very useful to mark all your "useful" equipment as Non-Droppable, so you won't accidentally drop or sell any part of it.