I've recently started playing and am at the Bell Gargoyle fight, and I'm starting to wonder. Is the whole world screwed up like this? Or is it just this country/continent?

I haven't learnt very much of the lore, and I'm still unsure as to why every living person is cursed and why people become undead and hollow.

It's a little ambiguous. One of the endings is supposed to purify the hollowed and bring about the age of man. There is some debate though about which ending does that. Some say it's the good ending and some say the good ending is a trick by the gods to have you continue the age of gods by becoming one yourself. It's not said in certain terms so it's open to interpretation.

A lot of the lore is explored by reading the descriptions of items and the rest is from talking to the NPCs. Early in the game when you don't have very many items and haven't met many NPCs the lore is fairly shallow. It gets deeper the further into the game you play.

The Story / lore requires quite a bit of attention from reading item descriptions and sometimes taking note of where you find such items as well as what the npc's and their purpose for being in Lordran. There are lore videos out there that explain a vast majority of the world but it's good to explore it yourself. It is, in the end, a large puzzle to put the story together.

What do you mean by the world being screwed up? the intro pretty much set the tone for the whole game.

@TEHMAXXORZ:

Here is a lore video that might help you out but are probably filled with spoilers, http://www.youtube.com/watch?v=ZvWvhZtaV7M&list=PL4825DBA198EBE9B9&feature=plcp

There are other continents on the world that Dark Souls takes place on but its been awhile since I've played it that I forgot what there names are. I think that the whole world is screwed up this because I'm assuming the gods rule over the whole world and not just the city/country of Lordran.

I know the player has the Darksign which is the Lord Soul that was given to the Furtive Pygmy and passed down his generation, that causes you to become unable to go hollow in my understanding. Hollow refers to the undead that have completely lost their minds.

As far as lore/story wise why people actually become undead and don't just die I believe that all the undead have the Darksign, like you, but they have failed to complete the quest that you are on, that's why you start in a prison because Gwyn doesn't want you to complete the quest.

I could be completely wrong since I haven't played the game in a long time and there really isn't anything addressing this on the internet.