THis article is really good at describing why:
http://amasci.com/amateur/whygnd.html
THe gist of it seems to be:
First we start off with just the two AC lines- since it's AC the lines are symmetric and there is no positive or negative line. They isolated from ground and everything else. Things work fairly well...but...
Why you connect one AC line to ground (the neutral)-
so charge doesn't build up on the power grid at end up floating both AC lines high above earth voltage (which are approximately equal to since you are on the ground). If enough charge builds up you occasionally get a lightning bolt jumping out at you from the power grid. THis line connected to ground is now called the neutral and carries thre turn current from the other "hot" AC line.
Why you have a 3rd line connected to the earth (the ground)-
Now that you've connected one line to the earth, whenever someone touches the hot-wire since the hot-wire has now been referenced to the earth to prevent the charge-build up mentioned earlier. Before you had to touch both wires at the same time for anything to happen (and probably the path wouldn't flow through your heart unless you touched one line with each hand so the current path is through your heart. So you add in a 3rd line for safety.
THis line can do a few things:
If the neutral gets cut, there is still a connection to ground so the entire piece of equipment doesn't float at the same voltage above ground (which will use you as a current path if you touch it).
If you connect this ground to the metal case of equipment, it also means that if the hot wire gets loose and touches the case it has the ground path for the current to flow (rather than you if you touch the case- it's like two resistances in parallel when one is much less than the other). This also makes a short-circuit which blows the fuses if the hot wire does touch the case.
Also, current flowing through the neutral can raise the voltage of the neutral too high above ground to be safe even if it is connected to the earth somewhere remote. Since the voltage of the neutral at your location may be above the earth due to the current flow. So you have a ground connection that doesn't carry current and does't have this problem of raising the voltage above the earth due to current.
And from what someone else mentioned the noise due to current flow in the neutral can cause problems. Ground has no current flow (normally) and thus doesn't have this noise problem for things like PCs, etc. So it seems the reason there is a separate ground and neutral is mainly to solve some new problem caused by solutions to other problems related with the fact that everything has a voltage relative to everything else and charge is always flowing around the earth.
NOT IN THE LINK:
And I guess an isolation transformer allows you to get back the "you have to touch both lines" since in the regular electrical grid you can still get shocked if you touch the hot-line. Then you get the best of both worlds- needing contact with both lines to be shocked and being able to leak away charge build-up in a widespread power grid. I guess this charge absorption problem isn't a problem for small devices but something like a wide-spread power grid intercepts enough earth-atmosphere charge exchange to build up the voltage to dangerous levels above the earth.