(Hope I'm doing this right, first time!)
Well, sex. Sex, sex, sex. Sexity Sex Sex. The forbidden act, the greatest sin of all, the subject of the world's oldest profession and the premise of one of the biggest markets in the world. In a medium so young as gaming, sex is often seen as the final taboo. In the Western world, games are rated strictly for it, media shit storms occur when it's a component and only a few series can truly claim to be "sex games". It contrasts quite strongly with the hyper-sexualised Japanese game market - Their games often featuring large breasted, seemingly under-age girls in clothing that make Princess Amelie from King's Bounty: Armored Princess look well covered.
I believe one of the main problems is that games are often regarded as being for children, even after all these years and countless series such as "Resident Evil", "Fallout", "F.E.A.R." and "Leisure Suite Larry". It's not that sex is a new thing in gaming (See "Custer's Revenge"), it's just that adult-oriented games are easier to acquire now than they were 20 years ago. Parents will look at a game for Lil' Johnny and ignore the rating on it or just give it a quick glance - I wonder how many sub-18 year old kids have a copy of MW2 because of this? - and then have a fit when the game shows half a second of a nipple. It's not that the Western world is adverse to sex or sexualisation (just look at women's magazines, for example), it's just we have a new medium and it'll take time for it to get near the acceptance of violence or strong language.
I remember the media outrage at BioWare over Mass Effect 2-3 years ago, but I find it's often misquoted. What I felt was the true issue is that the woman making the claims had not experienced the game nor even seen the scene herself and not the fact that the game had sideboob and bare buttocks (which are not uncommon sights in fighting games involving females). That game, in the UK, had a 12 rating from the BBFC - In other words someone under that age could not purchase the game legally. To me it was the media making a mountain out of a molehill until the facts were determined and it died down very quickly after that.
But look at the "Eastern" side of it; at the Japanese and their culture. They're much more open to sex then we are, and it's quite startling. You can buy a "vagina-in-a-can", for example! And look at their adult games; rape simulators, dating simulators and so forth! If a company tried to bring out a rape simulator now for a western audience it would be banned in most countries, I'd suspect, or at least be very hard to get. I just did a little bit of research and a game named "Rapelay" seemed to garner a lot of controversy in the Western world, even though it's a Japanese game!
If sex is handled in an adult, or at least respectable, manner in a game (such as BioWare's romances in Mass Effect 1/2 and Dragon Age, and CD Projekt's The Witcher) then I think this should be encouraged. Sex is a very natural thing but it's often treated without maturity and descends to "lol bewbies" quite often, and this doesn't help the situation. Gamers are rarely asking for a full-on few minutes of digitised hardcore pr0n, we want a fulfilling experience that's believable. Although it's very natural, it should be used in games within context because with no context all it really is tends to be "lol bewbies".
My personal experience:
I am, truth be told, an ex-eRPer. Yes, I was the female Night Elf you saw in Stormwind docks in a Lovely Black Dress or the never-AFK-but-never-moving Draenei in Dalaran. I've gotten more out of eRP than I've ever gotten out of girlfriends, and due to my own hang-ups and other personal reasons, I don't feel I can commit to a relationship/anything physical. eRP was my escape from that, and judge me as you wish, but I'm thankful it exists. I don't think it's disgusting, nor is it any different in practice to reading an erotica novel or beating yourself to pr0n. The appeal, for me, was that I could imagine it and live it in my head and that's a much more attractive thing to me than a woman sat in my lap.