Squid

The Squid is a new passive mob, despite it's giant teeth. It was added in the Minecraft beta 1.2 update. Octopus drop ink sacks when killed and can be found in water. They spawn on any difficulty and do not attack, similar to the Animals found on the Mainland. However, they are often considered scary, because of their long tentacles, similar to the Ghast.

Behavior
Squids swim around in water, sometimes in groups. Listen for a sound that sounds similar to dirt/sand breaking. They often swim fairly deep, and are difficult to see due to their dark complexion. When they move about, their tentacles open and close. This is the easiest thing to watch for in the deeper areas when octopus hunting. Here is the dirt/sand sound they make. 

Drops

 * 1-3 ink sacks

The Octopus in game.