Lag(Latency), does not affect your FPS in WoW. Seems people are mixing terms in this thread. The reason you're having a drop in FPS in shattrath is because of how many images are being rendered everywhere you turn. The city is bloated with useless npcs and hundreds of people, each having different sets of gear that your computer has to grab from your HD's and render on your screen through your GPU. Since HD's are as we know the slowest part of our systems, this can cause lower FPS in populated cities like Shattrath.
I can understand the argument from the other poster about lag causing a drop in FPS because your system is waiting for it to be told what to render on your screen, but it's simply not true in WoW. In WoW if your system is waiting for input from their servers, it will actually Rise in FPS because there is less to be rendered on the screen, until the server sends the packet with the desired data to be rendered. Your FPS can then be affected by Lag(latency) because your system is trying to catch up by rendering multiple images at a time instead of gradually rendering a few as you come into contact with them.
Example: You fly into shattrath and run into the middle to A'dal, very little appears on your screen, your FPS is 60, a few seconds later, you receive ALL the packets that tells your computer what to pull from your HD's and render. As soon as your computer starts to render ALL of these images it should been rendering since you flew into shattrath, it starts to bog down and drops to mid 30's because it's having to render the guys you passed outside, the npcs that were walking by you when you flew in and now all the npcs you're facing on your current screen. This is when latency can affect FPS, but when your system finally catches up, your FPS will level out and be what it should have been on the initial entrance had every npc/person/image been rendered as you got off your mount.
99.9% of the time FPS and Lag(Latency) never affect each other.
As for your FPS in shattrath, it's a bit more CPU bound there, I run an 8800GT and get 60 fps everywhere but shattrath with my CPU at stock, I OC it to 3.2 and I gain about 15-20 FPS in shattrath. 8800GT, Q6600 2.4 I get about 35-45 max graphics with loads of people in shat just to compare.