From the Facebook Blog:

Because photos are such an important part of Facebook, we want to be sure you know exactly how tag suggestions work: When you or a friend upload new photos, we use face recognition software—similar to that found in many photo editing tools—to match your new photos to other photos you’re tagged in. We group similar photos together and, whenever possible, suggest the name of the friend in the photos.

What can go wrong? Using a database of 500 million faces to automatically tag people in photographs? What if this system were applied to something like Google Street View?

Here’s what I wrote in Omniveillance nearly 3 years ago:

Although currently the tagging process must be done manually, new facial recognition such as Google’s Picasa system utilizes artificial intelligence computers to automatically index and tag the subjects of photographs.147 Software like Polar Rose is capable of scanning the entire World Wide Web, matching faces with previously tagged photos based on similarities in biometric features, and automatically tagging the photo with the person’s identity.148 Berners-Lee mentions tagging as one of the key prerequisites to the semantic web.149

Once an image is tagged, these captions can be searched and indexed like any other document on the Internet. As a result of this emerging image-analysis technology, a search engine like Google can easily correlate a person’s face with his name, contact information, personal preferences, friends, and any of his personal information located on the Internet. In fact, Google’s Director of Product Management, R.J. Pittman, “said that Google is developing visual crawling software that can be used for facial recognition and scene analysis.”150 Applied to Street View, this future technology can be combined with tagging and advanced image search capabilities to identify anyone who is recorded by omniveillance.

Don’t worry. Facebook lets you opt out.