When a city falls into the hands of an enemy side, the conquering side can choose to sack the city, reducing it below level 1 so that it no longer functions as a city. The resulting site is similar to ruins and can randomly pop Barbarian units, gems, and Magic Items. The city site may be claimed by any side and rebuilt. A barbarian Warlord can use the site to start a new side.
Sacking a city may result in some sort of gain for the sackers, potentially in the form of items, schmuckers, or gems, although there has been little evidence one way or the other.