Before I start, I'm not asking for dynamic lights or anything since I know they're not really possible with the lighting engine (at least not without glitches) However just a simple item (maybe make the ingrediant a disposable battery + maybe a glass pane) that when you throw it, it spawns a light when it hits the ground. I was moving through the Ocean on a boat and thought even though I have the scuba mask which is really cool, there's no way to see what's on the seabed without either turning off fog or placing down pumpkins/glowstone (which are both lame ways to do it) Having a stackable item I could chuck overboard that would sink to the bottom and then light up would be really cool. You could make it die out after a while (although the recipe's more than a torch anyway so I doubt that's neccesary)
I did a search for Flares and couldn't find anything so I don't know if this idea was already suggested and shot down or something (although I did see Greg talking about a Flaregun, which would also be pretty neat)