Compass

Compasses were added in Seecret Friday Update 9 on September 10, 2010. The compass needle points towards the last spawn point the player spawned at, whether in your inventory screen, chests, lying on the floor or while holding it in your hand. When the compass needle is pointing straight "up" relative to the player, the spawn point is straight forward.

If brought into The Nether the compass will wildly point in random directions, making it entirely useless for navigation.

You do not actually have to build a compass to see which direction your spawn is in. Just place the necessary components into their places on a crafting bench and it will point towards your spawn. This can save you some iron and redstone.

If your home is near your spawn, the compass is very useful to help you find your way back. Sleeping in a bed will change your spawn point, however your compass will continue to point to the previous spawn point until you have died and respawned there at least once.

Other than being used to find the spawn point, compasses can also be used to craft a map along with six pieces of paper. The map will be in the game when version 1.6 is released, and is currently unavailable.

Trivia

 * The compass, along with the Clock and the Fishing Rod, is one of the few tools you can stack.
 * In SMP, the compass doesn't tell you the exact spawn location. (Fixed in version 1.6)