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I just saw a Leica M9 priced at 6995 USD, and a Leica M8 at 6295 USD. This is similar to the price for a high-end Nikon D3X or a Canon 1D Mark IV. So, I am trying to compare the specs, but can't get some useful information (at least in my eyes as a beginner).
What would make me prefer an M8 or M9 over a D3x or 1D? Performance-wise that is, not because Leica is more compact or it has a tougher frame — or because it just is Leica.
Leica is a luxury brand with much smaller production runs than the big players in the camera industry.
Low volumes lead to high prices, especially since research and development costs have to be covered. In addition, there's more manual labor involved in manufacturing Leica cameras and lenses. This labor is German, which means higher wages and thus higher prices.
The luxury part translates into exclusivity. A large part of the draw of Leica is that not everyone can afford one. So even if Leica could lower their prices, it would not necessarily translate to lower prices.
Why would you prefer a Leica? The lenses are unique, in for far as no other manufacturer makes a rangefinder camera system. There's no DSLR equivalent to the Summilux-M 21mm f/1.4, for example, or the Noctilux-M 50mm f/0.95. However, you will have to pay many times more than the body to get one of these lenses.
Some people prefer the rangefinder for focusing and composing. The camera can be more unobtrusive, but this is less true now when it costs as much as a used car.
For a more detailed look at the differences between rangefinders and (D)SLRs, see this question and answer.
I would say that if you're a long-time Leica shooter, you'd prefer a digital M over a DSLR simply because you can use your existing lenses. If you're starting out, it's a lot of money to pay for some pretty intangible benefits.
Compactness / lightness aside there are no performance advantages of the Leica digital M series. In many ways the rangefinder design is inferior in the age of digital, as Leica discovered to their cost when they released the M8.
Without a mirror in the way a rangefinder lens can sit closer to the sensor. This was traditionally an advantage as you could make fast wide primes without the need for a retrofocal lens group.
However when this design was translated into the digital age, the angle at which light rays exiting the close sitting rear element hit the sensor was more oblique than with a DSLR, causing light loss among other problems (film, on the other hand was more happy for light to strike at angle). To combat this Leica used a thinner filter assembly on the sensor, which lead to the camera being too sensitive to ultraviolet light. Leica had to embarrassingly ship lens mounted UV filters to all their customers!
As a pure photo tool, the Canon 1Ds mkIII or Nikon D3x would be a better choice for the money. The Leica does have things to offer, though:
Leica has no advantages over DSLR or mirrorless systems in regard of automation and functionality available. You have to know the basics of photography technique enough as to not rely on camera's microcontroller as substitute to your brain. The lenses are the best, period (apologies to white-barreled, gold-rimmed crowds here). But it's a niche system, that works best for documentary-style photography. If you ever think you'd like shooting macros or airshows, you wouldn't have much fun.
Generally, if you have to ask this question, you're not quite at the point when you need a Leica. If you fall along the line of photography where Leica is at its best, the choice will come naturally.
I have a 1Ds mk II with matching L-lens outfit, and a parcel of film Leicas with Summicrons and Elmars and Summarons and what have you. I can't comment on the digital Leicas first-hand but from all reports the digital bits inside it just are not nearly as good as the Canon and Nikon stuff - no big surprise frankly given the resources than a small boutique company like Leica can devote to this compared to the Japanese juggernauts which sell millions of digicams per year to absorb development costs.
The big difference however is in the shooting experience - photographing with a Leica is just very very different from using a big (heavy!) pro DSLR brick. I imagine it to be somewhat akin to the difference between driving a small classic British stick-shift four-cylinder open two-seater roadster and a new, large, top-of-the-line auto-everything BMW. It just ain't the same, and so what if the canvas roof leaks a bit and the headlights don't necessarily work all the time and you have to have a box of replacement sparkplugs at hand at all times? It's FUN, dammit.
If rangefinder photography appeals to you (it certainly is not for everybody) having a full-frame digital M body might just be worth selling a kidney for. I know I'd like one, but not quite at the present price level :)
Performance-wise there isn't too much advantage to the Leica rangefinder system over to of the line DSLRs. Leicas are outstanding cameras, but, as stated by others, their smaller production runs and uncompromising dedication to outstanding build quality does make them more expensive than comparable cameras from other brands.
As Matt Grum said, rangefinders situate their lenses closer to the sensor plane than SLRs, so some of the lens designs can be different. Also, rangerfinder's viewfinders show more of a scene than just what will be recorded. This can allow you to better anticipate moving objects that will come in or out of the frame.
Other than this, the primary differences are the more compact build and tougher build. Performance-wise, at least as you frame it, there isn't much to set Leica apart. The main difference would be in how the smaller build and rangerfinder viewfinder would allow you to take photos in a different manner than using a SLR. It's difficult to describe in words, but if you've every used a rangefinder, you'll know what I'm talking about.
Leica lenses (and the complimenting camera body) simply take better, sharper photos.
I know this does not sound right, but one can pick out Leica shots from non Leica shots - sort of the difference between a Brownie snapshot and an Ansel Adams print.
An optical physicist explained it to me this way: "With modern computers and lens design software, most any competent lens designer can design a good lens. The problem comes in the execution of the design. Lens construction require CRAFTSMANSHIP. The tolerances which must be met to fabricate a truly excellent lens are finer than those available to mass production. Thus, the super lens requires far more time consuming skill, steps, and finesse than a volume produced product - hence the higher cost."
But there is still more to a Leica lens. The designers also go the extra mile in the design stage. The computer can make the computations, but it cannot create the best design by itself. The lens designer has to "play" with the design to optimize it.
An example: Joseph Schneider (a very competent German lens maker) designed (and built) a special "shift" wide angle lens for Leica. The Leica lens designer took a look at Schneider's design and came up with several small improvements, which Schneider subsequently incorporated into the lens.
A factor which is critical to the perceived "sharpness" of a lens is its contrast. Leica lens designers tend to be fanatical at delivering high contrast, even in the corners, and at wide open aperture. A key part of this is controlling dispersion of the light as it passes thru the lens. In layman terms, one can readily understand that if some of the light gets dispersed from, say the highlights, then the highlights will not be as light and bright as they should be. Since the dispersed light has to go somewhere, it will lighten the shadows. So there goes your contrast ! In addition, at larger (smaller number) apertures, more light is coming thru the lens, thus the greater impact of the dispersion on the contrast of the delivered image.
