It is true to say that a all guitars made out of cheap components are awful... whatever the brand.  How can I tell the difference between an expensive guitar and a mid priced guitar?  How can I steer away from a piece of rubbish.

I have been playing guitar for nearly 20 years, during which time I have everything from a entry-level beginners guitars thru USA Fender Strat to Jackson Soloist.  Let me tell you a little secret... brand is NOT everything.  When looking for a guitar you must choose a guitar aimed at the style of music you play. 
Folk - Acoustic (steel string)
Disco/Funk - Telecaster
Jazz - Gibson 355 (or similar)
Heavy Metal - Guitar with Humbucker pickups

The wrong type of guitar will never make the right sound.  I am not the type of guy that states it must, be a pre-CBS Fender so go find a real vintage rarity.  Quite the opposite, all humbucking guitars should be post-1959 (see pickups), superstrat styled guitars should be post-1987 (dawn of the Ibanez Jem design).  I believe that technology is improving guitars and guitar design so I rarely get excited to see a vintage guitar.

When comparing guitars it is always best to play the guitar to see if you are compatible with it.  However on Ebay this cannot be done... obviously look for a reliable seller, or a local seller where you can see the item.  So not being able to view an item can seriously hinder the judgement of a guitars value.

The standard guitar to reference to is the Gibson Les Paul Standard, a very good all-round guitar.  Many Ebayers quote "Gibson Killer" in their auction and it is the Les Paul that the comparison is made to.  The downside is that the brand is so strong that the name sells itself and over the recent years many of the top brands have watered down the quality of components to sell more units t lower prices.

So what should I be looking for?

Build location:

Is the guitar built in a craftsman's workshop or 3rd world sweatshop?  The USA built guitars tend to be a much higher quality than those from Korea and such and prices can be 3 times more expensive for this privilege.  Don't discount the Japanese though, they are generally a very high quality yet the brands aren't as famous.  UK guitar makers make excellent guitars in low numbers.

Pickups:

Whether the preferred choice is lipsticks, singles or humbuckers there are two words to look for "Seymour Duncan", an ex-employee of Gibson designed the definitive pickup that made the Les Paul's sound famous.  These pickups reach their maturity in 1959, all passive pickups since have been merely variations on these.

Active pickups, famed by EMG contain a battery powered pre-amp based in the guitar.  Released in the early 80s, these pickups deliver a high power signal which is able to get more overdrive out of the amp.  These are therefore popular with very-Metal guitarists.  They have a downside, the battery needs replacing every six months so could run out during a gig! Some people complain that the sound is sterilised during the pre-amp process and that the tone is ruined.  For this reason these pickups are not for Blues or Jazz musos.

Piezo pickups make acoustic sounds, these are usefull in live situations where a real acoustic guitar is too much hassle to mic up.  More guitars are coming with these fitted as standard due to the popularity of the Parker Fly.

There is a new type of pickup which are like standard pickups but with a super-magnet inside.  Made out of neodymium the "Q-Tuner" fits to a standard electric guitar but has a vastly improved harmonic response making it sound more like piezo pickups.  I haven't heard these using overdriven sounds and effects so I cannot say if they are versitile or not.  However it is worth looking into.

Best: Seymour Duncans, Bill Lawrence, Kent Armstrong, EMG (Active pickups only).
OK: Dimarzio
Avoid: Own brand as you cannot judge the quality.  Retro-fitted pickups installed by the owner as they might not be matched in tone or use the correct volume/tone pots.

Wood:

Do not underestimate the material of the body.  The posh musical word for instrument noise is Timbre, very similar to timber don't you think?  The timber in the body adds to the sound, how the guitar shakes and the ability to sustain a note.  Rule of thumb the denser the wood, the better the guitar.  Watch out for too heavy guitars though as they will be come uncomfortable quickly.   Thinking outside the box, new materials can do similar jobs.  For example real Steinbergers have graphite necks to lower weight.  A point to note is that brightly coloured guitars hide the low quality woods used.

Good: Mahogany
Avoid: Fake woods eg basswood, chipbard or plywood materials.

Neck:

Thru Neck guitars hold the best sustain but because these are built from bigger pieces of wood these will be more expensive.  These guitars will have better sustain, but only on a fixed bridge guitar.

Best:  Through neck/thru-neck/neck-thru
Next Best:  Maple neck (birds eye maple looks great)

Bridge:

A fixed bridge guitar will give more sustain and will stay in tune, this is a must for a thru-neck.

Floyd Rose bridge - only buy this one if you want to be Eddie Van Halen, it stays in tune but has much lower sustain due to its floating design.  No Floyd Rose equiped guitars will have a glued/set in neck as there is too much tension on the joint, so 99% of these are bolt on necks -not the best, but do the job.  Rhythm guitarists find these bridges difficult to play as they lean on the bridge and cause a sharpening of the strings.

Wilkinson bridge - There are less of these around these days but in my opinion a good alternative for those that don't want a Floyd Rose but want some vibrato.

Fender Stratocaster style bridges tend to detune easily.

Intonational Tuning:

Guitar makers have finally started to realise that the electric guitar has intonation problems.  There are a couple of compensation methods to make the guitar sound more in-tune.  For further reference googlize "Buzz Feiten".  This can be retro fitted but guitar makers such as Washburn and Tom Anderson incorporate Buzz Feiten as standard.  Extra note the Yamaha Frank Gambale signature model has misplaced frets as compensation.

Special Features:

Don't buy a guitar for special features as this can be more of a gimmick.  There are some interest items to look for.  Line 6 Pod XT owners can get a novelty guitar without pickups called a Variax.  Alternatively Midi pickups can connect to a synthesizer or the Brian Moore I-guitar can be plugged directly into a Mac or PC using the USB port.

Do I need to spend 1000-2000 pounds for a great guitar?

No: Looking at the above points an excellent guitar can be purchased for about 400 pounds.  A good all-round example would be the Washburn WI66 Pro which is similar to a Les Paul but for a third of the money.

For a fantastic guitar the Brian Moore USB i1 model (with Seymours and Piezo) will cost in the region of 1000 pounds.

By looking around you will find that many guitars have the above features, even brands that you haven't heard of.  These components are a sign that the guitar should be well made. even at a low price tag.  If you come across a guitar that you aren't sure of, ask the vendor but don't accept their word as truth and cross reference the model numbers and specifications.

And for heavens sake don't fall for the China (counterfeits) sellers.  Buy from UK sellers to avoid import duties... buying from a local vendor should give you a proper guarantee.