The purpose of the earth wire is to protect you from an electrical shock which of course could be fatal in the event there is a shorted live stator wire. I do not know what generator you have but from my knowledge of electrical/electronics, the problem is most likely generated from the stator windings insulation broken down and is shorted to the body. The internal protection of the generator is shutting it down because of the fault, If there are any electronic circuit in the unit, most likely it is working and should be ignored at this point. The fact that it works normally when the ground is removed indicates that it is a heavy short circuit most likely the stator to ground. For your sarety, DO NOT operate the unit because most likely if you touch the body of the generator while holding the ground wire, you will be shocked and it could be fatal.
The blue arrow points to the stator coils, If the insulation becomes broken and it touches the housing, the generator body becomes electrically live.
