The issue of being attacked while invisible came up yesterday, when a member of the party I was with was surprised to have been attacked and fugued by passing within 5 feet of an enemy NPC (while his char was invisible.)

I explained this is normal, and he quite reasonably doubted me (I wouldn't trust me, either!) I advised him to read up on invisibility on the forums, so I'm posting this to help him find information on the issue. As well, it doesn't hurt to remind everyone of the limits of invisibility, as many are unaware of the shortcomings until they discover themselves in the fugue.

This thread here seems to sum up what limited knowledge I have regarding NPC AI seeing invisible characters. In short, my understanding is that there is a small chance hostile NPC's will attack you if you pass too close to them while invisible.