This is a very complicated subject, but simply put yes you can be tracked to the area you live. Now to get your address is a little more tricky, however with the right skills this can be achieved (dependent on your ISPs security protocols). Of course the police can get your address from the ISP logs with a court order.
Now if you want a secure way of downloading P2P, music etc download ipig software and run it before you start downloading. It will secure you in a VPN (virtual private network) type connection, this will mask your IP and prevent other internet users from tracking you, your ISP logs will also only show VPN encrypted data and will be ultra difficult for your ISP to know what you've been download etc.
[Please note the above information is for educational purposes only, although VPN software isn't illegal to use]
BullDog(UK)