Lets say an engine was hit by a medium power missile, instead of just giving slightly less thrust it could give thrust in a slightly different direction or if it has hit by a fairly good laser it could have a hole (a decal applied to it with thrust and fire particles flying out) that could cause your ship to begin spinning when there is too much thrust.
Geez, I dunno. Bascially, you're screwing with the controls in an environment (3-dimensional space with pseudo-newtonian physics) where screwed up controls are seven flavours of unfun already. Same for Josh's idea of having engine damage leave you adrift in a worst-case scenario.
Seriously, players fricking *hate* it when they lose control over their avatar. Doesn't matter whether you're dying in a stunlock or your plane goes into a death spiral, you're basically screwed and the game gives you the finger by unnecessarily dragging out the unavoidable.
Seriously, if my options are to wait 20 minutes real-time for a passing ship to tow me to a station (or a bunch of passing enemies to grant me the coup de grâce ) or trying to navigate to a station when my thrusters are actively working against that idea, then I'll hit reload. Every. Single. Time. That. Happens.
I *seriously* suggest to implement an auto-repair for damaged subsystems, with an actual auto-repair system speeding the process up and providing hull repair as well. Why? Because thrusters, shields and weapons conking out can be somewhat fun if it's temporary. If you're in deep space without any friendly stations around, it's a death sentence without at least the critical subsystems coming back.
I could probably also live with a "critical existence failure" damage model where everything is fine and dandy until the hull points are depleted (after which things explode). It's unrealistic, but it beats getting "lost in space" every time some AI scores a lucky hit.