The answer is, it depends. If you are simply using MPLS in the core network without deploying any services (which is pretty rare these days), the packets would be IP routed in the case the LSP is broken.
When using services such as l2 or l3vpn, a break in the LSP will cause packets to be dropped since the core doesn't have enough information to deliver the packets using its IP routing table (in the case of l3vpn) and l2vpn is simply not routable.
Hope this helps,
Regards,
Harold Ritter, CCIE #4168 (EI, SP)
