Squid

Squid are 8-armed mobs with a blueish-teal skin and teeth that spawn in water. Squid are always passive towards the player, akin to the other passive mobs found on land. They can be found in water of any depth, in any biome, and spawn on any difficulty.

Uses
When killed, each squid will drop 1 - 3 Ink Sacs that can be used to dye wool. The ink sac, like a unit of dye, can be applied directly to sheep before shearing to make black wool or mixed with varying proportions of Bone Meal beforehand to yield light gray and gray dyes. Also, Notch confirmed that in 1.3.0 you will be able to craft a book and quill using ink sacs, a feather, and, obviously, a book.

Behavior
When moving about, the squid's tentacles open and close, giving them an appearance of pushing themselves forward. Squid will hover in place and wander around one layer aimlessly and do not deliberately interact with the player, even if attacked.

Squid are prone to gather near light under water, such as a Redstone lamp, glowstone or Jack-O-Lanterns.

Squid stay alive but become immobile when beached on the land. They can take fall damage and burn like any land mob, but (due to being aquatic) they cannot drown.

History
Squid were introduced in the Beta 1.2 update.

In Beta 1.3, squid were given the ability to move in three dimensions (rather than only along the bottom of the body of water).

In Beta 1.5, squid were incapable of swimming upward. When they did manage to swim upward, they would drift down with a zero net gain in altitude, resulting in a jittery animation. This was apparently fixed in Beta 1.7.

In Beta 1.8 Pre-release 1, the squid was the only mob that didn't drop an Experience Orb when killed by the player. This was fixed in 1.8 Pre-Release 2.

Until Beta 1.7 squid did not de-spawn like other mobs. This made squid a popular pet as once harvested they could be put in aquariums and kept there until they were killed by a player. However this was corrected because of their downward movement (at the time) caused them to pool in relatively deep crevices in the ocean or lakes, thus making ink sacs hard to acquire as further squid would not spawn until the local population had been lowered. In 1.7 they were made to de-spawn like other mobs, likely in preparation for the much deeper oceans in the 1.8 update.

Bugs

 * Despite not having feet, Squid make footstep sounds when swimming across blocks.
 * When logging into a multiplayer server, Squid may appear above the clouds. However, they will later disappear.
 * During multiplayer lag, mobs' positions are not updated by the server, causing especially irregular movement in Squid, such as flying and passing through blocks.
 * If the player stands far away, Squid will shift so that their heads point straight up and float in place until the player gets closer again.
 * When killed, Squid drop Ink Sacs, but take a second to disappear.
 * During multiplayer lag, Squid are temporarily invulnerable to T.N.T.
 * During multiplayer lag, Squid will also fly up in the air if you hit them with any specified item.
 * Squid, when killed, may not drop experience orbs.
 * If the player views a Squid without looking at the main body, two of their tentacles do not appear.
 * During server lag, squid may "swim" on the ground if that ground is 1-2 blocks above water.
 * Sometimes, in SMP, squid spawners will spawn squid on land.
 * (checked) You can die when you hit squid from boat. Game act is as Fall Damage.

Trivia

 * Squid are the first water mob.
 * Hitting a squid underwater causes them to rise approximately 1/3 to 1/2 a block.
 * Squid cannot be damaged by attacking their tentacles.
 * Before Beta 1.4, using a bucket on a squid while the squid was not touching another block would yield milk.
 * Before Beta 1.9, Squid cannot spawn in the Nether without the aid of inventory hacks, as there is no water in the Nether. As of 1.9 pre-release 4 they can spawn in water created by Ice in the Nether, and will spawn very frequently due to there being nowhere else to spawn.
 * Real squid have eight arms and two tentacles, while Minecraft squid just have eight arms, making them more akin to octopi. This may be a mis-translation due to the fact that squid and octopus have the same name in Swedish (Bläckfisk - Ink fish).
 * Squid behave like some land mobs and attempt to ride a Minecart. However this is not always useful as rails and water cannot occupy the same block.
 * Squid are the first passive mob that spawn at any light level, in water, and without grass.
 * When the world is loaded, all squid are aligned with the tentacles facing east.
 * It is possible for squid to spawn in underground lakes or waterfalls due to their ability to spawn in any water, source block or not.
 * In RC2, when Squid came out of the water and were hurt, they made the new player hurt sounds.
 * Squid spawners will only spawn them on layer 60, as the large water bodies (such as oceans, rivers and ground lakes) appear only on that depth. This means squid can no longer spawn in mountain springs or underground lakes.
 * Squid, Villagers and Snow Golems are the only mobs that don't make sound effects.
 * Squid are the only passive animal that cannot breed, due to this however they will spawn like the other animals used to.