from www.snopes.com:

Origins:   In 1997, Nathan Zohner, a 14-year-old student at Eagle Rock Junior High School in Idaho Falls, based his science fair project on a report similar to the one reproduced above. Zohner's project, titled "How Gullible Are We?", involved presenting this report Ban me! about "the dangers of dihyrogen monoxide" to fifty ninth-grade students and asking them what (if anything) should be done about the chemical.

Forty-three students favored banning it, six were undecided, and only one correctly recognized that 'dihydrogen monoxide' is actually H2O — plain old water.

Zohner's analysis of the results he obtained won him first prize in the Greater Idaho Falls Science Fair; garnered him scads of attention from newspapers, magazines, radio and TV stations, universities, and congresspeople; and prompted the usual round of outcries about how our ignorant citizenry doesn't read critically and can be easily misled. In other words, a tempest in a teapot.

This example aptly demonstrates the kind of fallacious reasoning that's thrust at us every day under the guise of "important information": how with a little effort, even the most innocuous of substances can be made to sound like a dangerous threat to human life.

The next time you receive an ominous message such as the one warning you that sodium lauryl sulfate (a common foaming ingredient used in shampoos) causes cancer, with the "proof" being that this caustic chemical is also used to scrub garage floors, keep in mind that the very same thing could be said of another ubiquitous cleaning agent . . . dihydrogen monoxide.

Update:   In March 2004 the California municipality of Aliso Viejo (a suburb in Orange County) came within a cat's whisker of falling for this hoax after a paralegal there convinced city officials of the danger posed by this chemical. The leg-pull got so far as a vote having been scheduled for the City Council on a proposed law that would have banned the use of foam containers at city-sponsored events because (among other things) they were made with DHMO, a substance that could "threaten human health and safety."