Village

NPC villages are a new feature that will be added in Beta Version 1.8, also called the "Adventure Update". It appears that the buildings in the NPC villages will be naturally generating. The amount of buildings in NPC villages, and how much space they take up is unknown. It is most likely that the amount of buildings will be random up until a certain number, and the buildings may also have different sizes. It is unknown at this time what kind of NPC's will spawn around and in the buildings. It will however most likely be Humans or living Pigmen. It is also unknown if the villagers will be passive, aggressive or neutral. How common these villages are is also under speculation. One can assume that they will be rare so that finding one is more of a rewarding experience.

A picture of NPC villages was released by Notch. It shows 12 buildings. (or it could be 11 because two of the buildings on the sandy beach seem to be merged) The buildings are made of Cobblestone and some Moss Stone, they also have roofs made of Wooden Planks, and have some Glass windows. Although they all are the same type of buildings they do appear to be different sizes. The two closest to the front on the sandy beach have roofs that are three blocks high, while one in the top left-hand corner has a roof that's six blocks high.

The picture only shows the exterior of the buildings, therefore it is impossible to determine what's inside them. It has been rumored that brothels will be added, but Notch has yet to confirm this.

More info on NPC villages will almost certainly be released soon as the adventure update is around the corner and Notch has agreed to be less secretive about it.

Old Interview of Notch
Notch once answered some questions about an idea he had, NPC Villages, where he revealed some thoughts about them:
 * If you are good to them (giving them items), they'll give you items back.
 * If you are bad to them (attacking/killing them), they'll try to do the same to you.
 * There would maybe be a chest, containing special items, but raiding it will anger the owners of the town/chest.

Trivia

 * The picture of NPC villages also shows what is being called Huge Mushroom.  It is doubtful that they have anything to do with NPC villages.