Gyahaha Fubaka, this is almost exactly the same kind of thing you- wait that's kind of a spoiler.
Anyway, in theory, I don't particularly like the idea of an author putting herself/himself into a game, especially expressing the concept of being some kind of god who made this world which is despite that an imperfect world yadayada, but how acceptable that is tends to depend on the arrogance or lack thereof of the creator combined with the quality of the actual game. And really, how one judges a game should really depend solely on the game itself, as, like someone has once expressed, "Love the art, not the artist."
I will assume you've seen the bigger secret in my level then, since you are bringing this up. However, whether or not someone inserts themselves into the game, it still can be considered part of the game itself, under most circumstances.
In my level, for example, my own insertion was in many ways a construct of my more noble, but at the same time bumbling characteristics. In essence, that was a cartoon of me, and it could be argued that the Nicklas in Knytt Underground is the same way, though not quite as serious in tone. My god persona was, arguably, almost the exact opposite of arrogant, and not at all god-like, and frankly, nether was Nicklas's persona. In fact, it was my theory that if our world had a god that created it, said god would probably have the same characteristics. My god persona, at least by my view, is not someone to be idolized, or even highly respected. He is my vulnerability manifest in digital form.
Now, I know my story isn't perfect, and frankly, neither is Knytt Underground. However, what drove me to comment in the first place was the simple fact that metamorphosis decided not only to stop playing altogether because of this single element, but to post about it here too in an entirely unsympathetic manner, and I don't buy his/her rebuttal either. It just came off to me as rude, and highly nonconstructive.