The tool is called the Region Editor and was capable of procedurally generating textures, trees, rocks and plants per region according to adjustable settings. However most of the placed items would have to be adjusted by hand so technically most of the world is hand placed.
You don't need to touch things by hand if you're skilled enough with the region editor. I've generated a lot of regions for MERP during the last 1,5 years (Rohan, Fangorn, Misty Mountains, Forlindon, ... ) and never needed to adjust objects by hand. All you have to do is to finetune the settings of the region generator long enough, but I admit it took me quite long to learn how to properly generate landscapes.
Everything that you see in these screenshots is generated and nothing touched by hand:
http://www.moddb.com/mods/merp-middle-earth-roleplaying-mod/images/fangorn7#imagebox
http://www.moddb.com/mods/merp-middle-earth-roleplaying-mod/images/the-gap-of-rohan#imagebox
http://www.moddb.com/mods/merp-middle-earth-roleplaying-mod/images/nw-eriador-by-noirdesir#imagebox
http://www.moddb.com/mods/merp-middle-earth-roleplaying-mod/images/wip-fangorn#imagebox