Bone Meal

Bone meal is a material derived from the bones of vanquished Skeletons and used as a dye or fertilizer.

Uses
Like all dyes, bone meal can be applied directly to sheep to color them white. This is the only direct use of bone meal as a dye since it cannot be used to change colored wool blocks back into white wool at a crafting table. It can however be combined with other dyes to produce new colors:

Unique to bone meal is its use as a fertilizer - when applied to crops or saplings one bone meal is consumed and the plant grows instantly, though there is a chance of failure and in this case, the procedure must be repeated. Crops become ready to harvest and saplings will grow into trees, provided they have enough space. This effect does not work on cacti or sugar cane. Additionally, bone meal used on saplings that do not have enough room to grow will consume the bone meal with no visible effects. Care must be taken when growing trees as the player does not block tree growth and new leaves or wood blocks may cause suffocation if they grow into the block containing the player's head.

Trivia

 * Bone meal's fertilizing properties make it ideal for growing large quantities of trees or wheat in tight spaces very quickly. A single bone's worth of bone meal can generate enough wheat for one bread or cake
 * Because bone meal used on a sapling grows a random tree, if there is not enough space for that specific tree, the bone meal will be consumed, and a tree will not grow, but may grow if tried enough times, because it will grow a different random tree.
 * Because the size of random trees are dependent to the biome, if you are growing trees in tight spaces using bone meal, it is most efficient to grow trees in a desert rather than a rain forest, because trees growing in deserts generally grow smaller and have less branches. Because of this, it may take a stack of bone meal to grow one tree in a confined space in a rain forest, while it may only take 1 to grow a sapling using the same confinement conditions, but in a desert.  To summarize: if you are growing trees in a confined space using bone meal, it is most efficient to do so in a desert.
 * Using bone meal to fertilize, harvest and replant Seeds is a fast way of creating a large number of seeds at the expense of bone meal instead of hoes. This method also produces wheat and can be used to replace traditional farming methods.
 * As of Beta SMP version 1.3, there is a bug with Bone Meal so that it will have a 100% chance of succeeding on the first try when used on trees and crops. This can be used to quickly create huge crops and trees without the need for much Bone Meal.
 * A skeleton will drop 0-3 bones and bones can make 3 bone meal which means you can get 0-9 bone meal from a skeleton.