Water can be transported and placed through the use of buckets. There is a limit to how much space a bucket of water will fill.
Creative flooding will be accessible in the 1.8 update.
When swimming underwater you can drown. A blue bar appears that indicates the amount of air you have left. After the blue bar is completely depleted, your red health bar will start decreasing until you either surface for air or die. Pressing the jump button while underwater will make you rise to the surface.
However, if you build a container of some sort, like a 4 wall building and fill it with water, and then try to destroy one of the walls, a message will appear saying "Can't Clear Might Flood".
This aspect of water can actually be used to make invincible water walls. To make a "water" wall simply build two 1 block-wide parralel walls with a space in between. Fill that space with water, and the two walls can't be destroyed due to "Can't Clear Might Flood" unless the area is small enough for water to fill. To destroy the wall you must remove the water from in between the walls. Water walls are very useful in splitscreen multiplayer, due to the fact that other players cannot destroy them.
You can use markers to clear out a Water filled structure, but its dimensions limit to 64x64x64.