The saying goes that in the US, you can show someone cutting off a breast, but you can't show someone caressing one. I have seen several cases where the artwork for European games had to be made more war-like for distribution in the US. I also know of one very interesting case of sex, or something approaching sex, needing to be removed for distribution in the US. Sadly, I don't think I can publish the details here.
However, this anecdote of a nipple being cut (in the sense of censorship), combined with the amount of hours I have spent in the last 9 months working on versions of GTA: Vice City for the Xbox with less violence than the US version, has made me decide that I want to try my best to not censor myself, within the boundaries of my sphere of influence and of what fits the project. I would be proud if the next game that comes out with my name in the credits will need to have parts censored for the US market that can stay in in Europe.
David Cronenberg, one of my heroes, once said something along the lines of that you shouldn't censor yourself, because someone will do it for you anyway (the way he said it made more sense). So why not do what fits the vision of the game, what needs to be done for the game to be coherent and consistent, and see how far it can be taken? It may run into opposition from the people you work with, it may not be feasible given the constraints of production, but it's important to have a balance of forces, and to make decisions in the right way, at the right time, for the right reasons.
Ask me in a year or so how things are going.