I remember hearing something similar to that when MK II came out in the Arcades. I don't think it was any more than a rumor.

Sounds like rumor mill solid waste production to me.

Mortal Kombat 3 : Omega....hehe....

I remember hearing something similar about Mortal Kombat 4 too,

there was a story that the gore was much more detailed, I was told that when scorpion transformed into a giant scorpion and ripped you in two, the intenstine was still connected to the two body parts. I also heard that you could rip your opponents fingers so they dangled off your hands.

Almost certainly a rumour but would of been cool none the less.