With out any names, locations or anything else for spoiler reasons, I came across a bit of a strange one.

Returning to town after a bit of rambling through the countryside picking flowers and murdering small animals for their hides, I find lying dead in the middle of the street one of the names NPCs. I hadn't done it and no other NPCs had mention of it in their dialogue trees so I have no idea what happened.

Is it possible for NPCs to get in fights with each and kill each other? or did he die by bug?

Yeah he was already dead and lying in the middle of the street before I got there.

I'm not sure. Possibly in the same sense as oblivion.

I've read, but not confirmed myself, that even if you drop a sword in the middle of town... an NPC might pick it up and attack you or another NPC.

Yup, him.