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 generated. The number of buildings in villages, and how much space they take up is unknown. It is most likely that the number of buildings will be random up to a certain number, and that the buildings may also have different sizes. It is unknown what kind of NPC's will spawn in and around the buildings. It will, however, most likely be Humans or living Pigmen. It is also unknown if the NPCs 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. (It could be 11 as two of the buildings on the sandy beach seem to be merged) The buildings are made of Cobblestone and some Moss Stone, they have a Wooden door, they also have roofs made of Wooden Planks and Glass windows, though their composition could change by the 1.8 release. 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 is six blocks high.

The picture only shows the exterior of the buildings, therefore it is impossible to determine what's inside them.

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.

NPC Villages will have their own biome in order to solve many of the problems currently hindering their development.

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 a Huge Mushroom. It is doubtful that they have anything to do with NPC villages.
 * Notch originally worked on NPC Villages by himself, but eventually gave the task to Jeb, so that he could work on other things.