The IEEE 802.15.4 communication protocol is a de-facto standard for wireless applications in industrial and home automation. Although the performance of the medium access control (MAC) of the IEEE 802.15.4 has been thoroughly investigated under the assumption of ideal wireless channel, there is still a lack of understanding of the cross-layer interactions between MAC and physical layer in the presence of realistic wireless channel models that include path loss, multi-path fading and shadowing. In this paper, an analytical model of these dynamics is proposed. The analysis considers simultaneously a composite Rayleigh-lognormal channel fading, interference generated by multiple terminals, the effects induced by hidden terminals, and the MAC reduced carrier sensing capabilities. It is shown that the reliability of the contention-based MAC over fading channels is often far from that derived under ideal channel assumptions. Moreover, it is established to what extent fading may be beneficial for the overall network performance.