The reason this was included in GT2 (along with multiple variants with different engines) and GT3 was because EA had a special deal with BMW that stopped other developers putting M cars in at the time; hence no M3 or M5 in either of the two games. So instead, PD just put in various models to bolster up BMW's car count. With the embargo lifted by the time GT4 was developed, they could put in the M3, M5 etc. with no issues, which is why this wasn't needed anymore. My only guess is that PD based the E46 M3 in-game model on the 328i, except they overwrote the model entirely instead of just changing it and saving it as another model since it wasn't necessary anymore.
As for the car itself, it'd be cool to see it back, but it really wouldn't serve any reason other than bolstering up the car count some more. If it was brought back as a standard, it'd probably look pretty poor, since it is a GT3 car model. If it was premium, most people would ask why efforts weren't directed towards a more iconic BMW, like the M3. A few other cars haven't made the cut either; the Evo VII rally car and its prototype went bye-bye after GT Concept.