In C#, why is String a reference type that behaves like a value type?

Strings aren't value types since they can be huge, and need to be stored on the heap. Value types are (in all implementations of the CLR as of yet) stored on the stack. Stack allocating strings would break all sorts of things: the stack is only 1MB for 32-bit and 4MB for 64-bit, you'd have to box each string, incurring a copy penalty, you couldn't intern strings, and memory usage would balloon, etc...

(Edit: Added clarification about value type storage being an implementation detail, which leads to this situation where we have a type with value sematics not inheriting from System.ValueType. Thanks Ben.)

It is not a value type because performance (space and time!) would be terrible if it were a value type and its value had to be copied every time it were passed to and returned from methods, etc.

It has value semantics to keep the world sane. Can you imagine how difficult it would be to code if

string s = "hello";
string t = "hello";
bool b = (s == t);

set b to be false? Imagine how difficult coding just about any application would be.