Yes, anybody can read your e-mail at any system it passes through. It's by no means a secure system. If you want to be sure that no-one knows what you're saying, then you'd have to encrypt your message.
As for deleted messages, any stored on your own system will go by whatever method your system uses. Under DOS and most other operating systems, deleting a file doesn't actually erase the data; it simply marks the disk sectors which held that file as free, so that they can be re-used when needed.
As for the server which holds your mail, the same constraints apply (chances are your server is running Unix), plus extras such as how long the ISP keeps old messages before deleting them, how long they maintain backups of your data, etc.
