Yes. You can kill all the guards and most of the people in the town. The "important" people (ones who have to do with the plot) cannot be killed, but are instead knocked out and will come back. One way to kill the guards is to summon monsters to kill them for you. Another way is to get up on a roof and snipe them with magic or arrows. By the time I quit, it was easy to kill guards, but it was because I had become extremely powerful.