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Sunlight is the name given to the light which illuminates all blocks which do not have a shadow cast over them by a non-transparent block positioned vertically above them in the sky, or if it's raining. Cluuds do not cast shadows, and shadows are not affected by the position of the sun in the sky. However, during inclement weather (rain and snow), clouds affect the amount of sunlight in the world. During these storms the ambient light value during the day will be reduced from the usual 15 to 12, and during thunderstorms the light level will be reduced to 7, allowing hostile mobs to spawn.
Sunlight (or torchlight) can be used to turn dirt blocks into grass blocks, as long as there is an illuminated grass block adjacent to the dirt
The sun burns all undead mobs (Zombies and Skeletons) during the day if they are in the sunlight. In update 1.2, Skeletons and Zombies will run into the shade (AI updated), as a result they will not die as easy and it will be more difficult to navigate throughout your world. Zombies and Skeletons can survive during the day if they are in the water or in the shade. Sunlight also activates Daylight Sensors. When it's high noon the block could be used to activate 16 redstone dust and all redstone blocks connected to it. But it still works when the sun goes up and sets (only activating about 1-6 blocks, and the sun rising activates 1-16 blocks). As the sun moves across the sky the sunlight sensor will slowly deactivate of 1.5