What happened
A bitcoin miner running version 0.8.0 created a large block (at height 225,430) that is incompatible with earlier versions of Bitcoin.
The result was a block chain fork, with miners, merchants and users running the new version of bitcoin accepting, and building on, that block, and miners, merchants and users running older versions of bitcoin rejecting it and creating their own block chain.
What is being done
Large mining pools running version 0.8.0 were asked to switch back to version 0.7, to create a single block chain compatible with all bitcoin software.
Questions & Answers
I'm not a miner or a merchant, what should I do?
Nothing. Your bitcoin software will switch to the correct chain automatically, no matter which version you are running.
Are my bitcoins safe?
Yes.
I'm a merchant accepting bitcoins, what should I do?
If you are running version 0.8.0, there is a small risk that payments with more than 6 confirmations could be double-spent on the 0.7-compatible blockchain. The risk is small because this is not a network split-- tras*actions are being sent to both sides of the chain split, and it is unlikely (but possible) that somebody could get two versions of the same tras*action into the two sides of the chain.
What will be done
The core developers are investigating exactly what causes the old versions to reject the new blocks, and will release a 0.8.1 version that avoids creating blocks that are incompatible with older versions.