Because the full power of Java exists in Applets. Browsers do their best to sandbox it and to make sure users give permission before it is allowed outside the sandbox. There are probably other reasons too, but that's afaik the basic reason.

I think it's a little unfair how the whole industry has treated Applets vs. Flash. Applets were pretty nice but Sun couldn't really fight it out like Adobe did against the other larger players.

Anyhow, I disabled Applets and Flash recently myself too. The web works ok, thanks to Apple I guess, but I still need to flip on Flash occasionally.