The problem:
Animations are currently disconnected from the world around them, any part of the body you animate overrides its option to react to the world around it or even to the body its animating
The suggestions:
Have an option in the animation to mark bones as being affected by the area around, like if apply to the arm and you do a punch it will stop when hitting a physical object (like a wall)
Second option/suggestion: an ability to "lock" a bone into a position so for example, you can "lock" the hand bones to the back of the head, so the arms and all will move with the head of the avatar trying to "keep" the animation, but still allowing some flexibility so you can even leave the head to look where the mouse is, and yet leave the hands holding the head (maybe even fitting them self to the head size)
Note: I yet to work on a physical engine of this stuff, and yet to even check the SL viewer code deeply, so I don't really know if this is even possible to do ^^