Sheep

Sheep are passive mobs that supply wool when sheared or killed and can be dyed with any of the 16 colors before shearing to produce colored wool. Sheep are 1.25 blocks tall, 0.625 blocks wide and 1.4375 blocks long, and they naturally spawn in the following colors: white, black, gray, light gray, brown, and pink. Killing a sheep will drop 1 wool when killed, whereas shearing yields 1-3 each time.

Usage
Wool is easiest to obtain from sheep, as it is very difficult to craft wool using string. It can be obtained by shearing them with Shears or killing them. Shearing a sheep will produce 1-3 wool. As of version 1.1.0 sheep can now regrow wool by eating grass turning the grass block into a dirt block. They can also eat tall grass. Baby Sheep eat grass much faster than adults. The sheeps' head also moves down and wiggles to imitate eating, but lambs' head goes inside the dirt itself.

Sheep will drop one wool when killed even if they are killed by Fire, Cacti or Wolves. Wool can also be crafted using 4 pieces of String, but it is less hazardous for the player to shear sheep rather than hunt down Spiders constantly.

A block of white wool can be crafted with a unit of dye to produce colored wool. However, a much more efficient method is to apply the unit of dye directly to an un-sheared sheep by right-clicking on a sheep (any color) while holding it, as the dyed sheep can drop 1-3 blocks of colored wool when sheared.

Behavior
Like other passive land mobs, sheep wander around aimlessly, often spawning in flocks of 2—8. They can be heard bleating occasionally, even from some distance away. When they encounter an obstacle, they will often try to jump over it, even if the object is too tall to jump over. Sheep can swim and make no attempt to stay out of water, therefore a common sight might be several sheep bouncing up and down in the water. A sheep's color has no effect on its behavior. Sheep will eat grass, turning it into dirt. This will make their wool grow back if they are sheared. The regrown wool will be of the same color as before the sheep was shaved, regardless of the original color. Packs of wolves may attack the occasional loner sheep.

Breeding
Breeding two sheep will produce a baby sheep of the same color as one of the parents, the color is more likely to be that of the parent fed wheat first. If you give a red sheep wheat, then a yellow, the baby is more likely to be born red. No mixes of colors (like orange) will occur. Sheep will produce baby sheep of the same wool color as their parent, even if that parent has been sheared. This can be used to obtain large quantities of colored wool, rather than relying as heavily on potentially rare dyes, such as Cocoa Beans or Lapis Lazuli.

History
Sheep were first introduced in Survival Test mode. Before leather was added to the game, wool was used to craft leather armor. Each sheep dropped 1—3 white wool when hit (but this did not injure them) and 0—2 brown mushroom upon death. In Survival Test sheep used to graze and eat grass, turning it into a dirt block, and after eating three grass blocks, sheep would regrow their wool. In Indev and Infdev, sheep would only drop 2 blocks of white wool when hit. In an old Indev version, sheep would drop a mix of white, gray or black wool blocks. Sheep then reverted to dropping only 1—3 blocks of white wool when hit in Alpha. As of the first Beta update, sheep began to drop 1—3 blocks of the same color of wool as the sheep when it was hit.

In the Beta 1.2 update, sheep could naturally spawn with black, gray, and light gray wool along with the traditional white. Sheep could also be painted with dye and sheared to obtain colored wool blocks. As of Beta 1.4, brown and pink sheep were added to the naturally appearing colors of sheep. Beta 1.6 changed the recipe for wool from requiring 9 pieces of string to 4. With the inclusion of shears in Beta 1.7, sheep drop 1 block of wool when killed and 2—4 blocks when sheared.

In Beta 1.9 Pre-releases 2—5, Sheep/Lambs spawned via animal breeding would always be white regardless of their parents' color. From Pre-release 6 and subsequent versions, the baby will take on the color of one of the parents. Having two parents of the same color assures a certain color offspring.

Sheep were originally planned to drop meat when killed. As of the Beta 1.8 update, Raw Beef, and Raw Chicken are animal drops, but sheep still have yet to be associated with any consumable item. Before the Beta 1.7 update, the Player did not need to kill sheep to obtain wool because hitting them, even with a non-damaging attack such as thrown Snowball or a fish hook from a Fishing Rod, would cause them to drop the wool. Now Sheep do not drop wool or enter a wool-less state until the Player shears them.

Prior to Beta 1.9 Pre-release 3, Sheep had health. It was it was changed to health in that update.

In Minecraft Snapshot Update 11w49a, sheep reverted to dropping 1-3 wool when sheared. In another snapshot released by Jeb_ Sheep will now eat Grass and regrow wool as shown in this video. Interestingly, they will regrow the color of wool they had before shearing, even if they had been dyed.

In the Pocket Edition Alpha 1.2, Sheep and Zombies were added, making them the first mobs in PE. So far only white sheep have been discovered. We will keep you updated on the Pocket Edition colors.

Since 12w07b Sheep have the new AI system. 

Natural (in order of rarity)
* White was the original color before Beta 1.2.

Trivia

 * Sheep were the second mob to spawn with both a separate body and armor file, the first being the pig; the sheep's "armored" state is wooly, while the pig's "armored" state is when they are wearing a saddle.
 * After being sheared, all sheep (regardless of their original color), will have remnants of white wool color on their head and legs.
 * Sheared sheep have a more slender head and exposed ears.
 * If you damage the sheep 7 hits (3 1/2 hearts) you can get 5 wool blocks by clicking both mouse buttons at the same time while holding shears, though it requires practice as you have 1/20 of a second between each mouse click.
 * If a sheep spawner is placed via hacking, there will be a black sheep model spinning inside, but it will spawn only white sheep.
 * If you try to shear a baby sheep, it will give you the same wool an adult sheep could drop. When the baby sheep grows up, however, it will remain sheared.
 * Currently, if one were to sprint and knock back a sheep while the sheep is in its grass eating stance, it will eat the grass it gets knocked into, and it will take no attempt to run away after/while eating.
 * Sheep will eat grass through half slabs.
 * The bottom of the feet to sheep aren't rotated 180 degrees. A sheep hoof is split in the front.
 * Once a sheep is dyed and sheared, its wool will strangely retain its dyed color once it grows back.
 * Sheep can be "herded". If you have wheat in your hand, sheep will follow you around, making it easy to herd them into a pen.
 * In Pocket Edition, their legs are also the color of their wool.

Bugs

 * A very rare glitch where a sheep can get stuck in the ground can happen. This seems to happen because the sheep is a little bit taller than 1 block.
 * A bug where sheep jump up to about 6 or 7 blocks high and/or they can glitch through fences (confirmation needed).

Future
Jeb may add mutton to Minecraft.