While I can understand her reasons for this, something about it reminds me of those people who delete their journal every six months...
I understand their reasons, mind you. Being so exposed publically (and sometimes so influenced to extremes) can be difficult, and there are good reasons to pull back, restructure, or even temporarily halt your degree of public exposure... but the thing is, you are still you and there is probably something that made you who you were/are.
Rather than trying to cut off a part of who you were (and, to some extent, still are...) isn't it more productive to consider what it is that you would like to become and to establish limits and boundaries that are appropriate for you to be that person?! It is hard to believe that the very act of recording one's voice is enough to ruin one's life... touring, dealing with the record labels, getting hounded by the press... yes, I can see that causing problems, but recording in and of itself?
Somehow, I don't think that it is ruining her life. In a year, she will still be Sinead O'Connor and people will still bug her, whether she releases albums of folk music or not.
If you really don't want the attention, don't tour. Don't put your picture on the cover. Change your appearance. Record under a pseudonym. But to throw away your gift forever?!
Maybe it's just me, but I would sooner be a dancer who cuts off my feet than a singer who loses my voice.