Difficulty can be toggled via the Options menu in Minecraft. Changing this option has a direct impact in the gameplay itself. No setting impacts the quantity of hostile mobs that spawn, including peaceful. There are currently four difficulties in the game.
Difficulty
Description
Peaceful
Player regains health over time. Hostile mobs do spawn, but are removed from the game instantaneously. Switching from any other difficulty setting to Peaceful results in existing hostile mobs being removed as well.
Easy
Hostile mobs spawn. Enemies deal less damage than on normal difficulty. Creepers will cancel their explosions after moving only a short distance away.
Normal
Hostile mobs spawn. Enemies deal standard damage and have standard health.
Hard
Hostile mobs spawn. Enemies deal much greater damage than in Normal Mode, and Creepers will not cancel their attack unless a big distance is between them and the player, making the explosion much harder to avoid.
Possible difficulties
Notch said in his blog that he would add the "hardcore" difficulty level. The rules would be that when you die, the world is deleted and you have to start afresh with a new world. The idea came to Notch from a Minecraft gameplay blog on the PC Gamer site (blog)
Tips
If you are having trouble getting started or exploring caverns, the best thing to do is change the difficulty to "Peaceful". You will be able to explore caves or build a base/HQ much more easily. However, this does not give you the full experience, and you will have to turn the difficulty up if you want to get all the items and tools, such as the bow, or bones to make bonemeal. A good recommendation is to turn on Peaceful during the day, and then turn the difficulty back up at night IF you are prepared. This way, you can get both the benefits of the two ways to play.
Trivia
Notch made a tweet on October 22nd 2010, stating that "(He's) changing "difficulty" to "realism". Lowest setting = creative. Highest setting = starve"