I Think the Island idea is perfect, but there should be an option were you can sail away to the main continent in a boat, but you dont recieve the awesome non-drop gear you get from stayin at the island, thus making it very hard for you to level when you get to the main continent. Either that or you have to pay for a boat to come from the mainland and pick your nooby up from the island.
A solution to the "Class towns" would be class guilds, or whatever you want to call them. Each guild would have their own house with merchants/quest-givers inside.