Just wanted to state it for the record, because I notice facts and details often get lost in discussions.
My own take is that I agree that the Mary Sue label gets used way too much and inappropriately for all fic [I hate labels anyway and I hate making distinctions among pieces of writing; there's good writing and bad writing and that's it].
But I think at the core of the term, as the discussion with Paula Smith makes clear, is the idea of psychic space or lack of it. A Mary Sue character is so completely identified with the writer, that there's no psychic space left inside for the reader to climb in to and play along. The result is that readers tend to feel alienated ---it's like the writer created the character solely for his/her enjoyment and satisfaction and left the reader out with his or her nose pressed against the glass.
And I should add that, as someone who's taught writing for almost 30 years, I find that Mary Sue is more an early stage of development that, like Piaget's stages of development for children, all writers must go through.