What can I do with Villagers?

Villagers were introduced in the beta 1.9 pre-release, and, for the most part, act like passive mobs: they'll get up in your grill and walk around without a care in the world. When you kill them, they don't drop anything.

In addition, 1.2 brought a number of changes to mob AI such as villagers:

• entering houses at night and leave them in the morning
• breeding to populate all the houses in a village
• enabling the automatic creation of iron golems that protect them

The first new behavior—entering houses at night and leaving them in the morning—allows you to use villagers as a poor man's daylight detector.

Finally, as of snapshot 12w21a, villagers power Minecraft's economy by trading items with players.