O Yeah!
I totally think a Zelda MMO is a good idea. It would need a lot of work, but Nintendo would never let something this big get released without a lot of effort being put into it. I would image a single server world have to be massive. I would think a version of Hyrule akin in design and artstyle to TP and OoT would do for your starting point. Each person would get their own castle and town to develop and protect. The various dungeons and races could give you quests that would allow you to gather new items and resources. The game would still include different enemies and NPCs, but dungeons might be limited in complexity to allow for the many players. You could even gather allies and loot the towns of your enemies. You'd still play as a single Link, but your opponent would be allowed to stock his town with guards and defenses to help him fight you, although he'd prefer to be at the battle in person. The ultimate achievement would be to rescue Princes Zelda with a team of allies (required) from an intense battle with a Ganondorf Boss. This would allow your character to head to the other regions of the game.
Then you could go into the lost woods and go into the hole to Termina. Here you would meet Team 2. They would have a similar setup to Hyrule, but they would have a vast version of Termina, Each player would be able to build their own Clocktown and gather masks to gain power. It would be a similar setup to Hyrule, except the stories and challenges would be Termina-oriented.
Alternatively, You could travel through a secret tunnel to the west of Hyrule. While there, you could progress through a passage in the western end of Gerudo Desert. There you would come across the Great Sea. It would feature dozens of islands to explore and have fun with. It would also feature a third team.
These teams would at regular intervals (maybe one day a week) go to war with each other. These passages between worlds would serve as bottlenecks as hordes of Links engaged in large battles for domination of the land, and there you have an MMO.
Epic.