Considering that MQ's popularity with NSCs went up by a huge amount not so long ago, I'd say it's not dying ;)
There was a thread some time ago with a strikingly similar title. A lot of excellent posts were made, and it would be really nice if the darned thread could be found. Unfortunately, it has probably been swept away, never to be seen again. If anybody remembers that thread, and happens to have a copy of it (unlikely as that may be), it'd be nice to see it again ^_^
Anyways, I don't believe MQ is dying. The staff may be small, but they are dedicated. Sure, they may not be pumping out major storyline advancements like they do over at DF, but there IS stuff happening. In fact, I think it's hard to say that it's dying; there are still weekly releases, and things are still enjoyable to play.
I think the main reason that MQ is not "thriving" as much as other games is because the player base, not the game, has been dying out. Traditional fantasy games are notoriously more popular than any other genre of RPG. While in the beginning a truckload of people started playing MQ because it was new, they gradually started to leave as they realized it wasn't their cup of tea. There aren't too many new people coming in because, honestly, not many people go to google and type in "sci-fi fantasy rpg" when they want something to do. It's an inherent problem with sci-fi games, not just Mechquest.
On a slightly-related tangent, I've seen some posts saying that "MQ isn't cared about," which I think is a blatant lie. Understaffing may be an issue (which many people have suggested in kinder terms), but it's not necessarily the core issue at hand (which I believe to be the player base not being very strong). And of course AE cares about MQ very much; they only spent quite a few years developing, nurturing, and continuing the game, have they not? ;)
In-game difficulties can also play a huge role in why people aren't playing the game, but I'll leave that to the Balance boards :P
Every time this question is asked, the same, defiant cry of "No" is heard. Obviously, there isn't too much to worry about. So long as people keep playing and encourage the staff (and beg for more stuff, of course), this persistent mass of code isn't going to keel over any time soon.