First, let's get the how out of the way.
Go to Account (upper right corner of homepage) -- Privacy Settings -- Custom settings (bottom middle) -- Suggest photos of me to friends -- Enabled/Disabled (check Disabled)
Moreover, PCWorld pointed out a way to request that Facebook remove summary information about your facial recognition feature. This is crucial (we'll explain why later).
Login to Facebook - Click on this link -- Click the contact us hyperlink (In the sentence You can contact us to request that we remove all of your photo summary information) -- send Facebook the automated message that pops up in the box.
Now, let's get to the why.
Behind the Facebook facial recognition feature is a huge database that matches your face in real life with your Facebook identity (including the name, occupation, and whatever information you provide to Facebook).
The danger is that anyone can just snap a picture and find out everything about you that you share with Facebook. It's an automatic invitation to be identified each time you show your face to someone.
Let me give you a few examples.
You go to protest against a repressive regime, the secret police snaps a photo of you, and then come next day knocking on your door.
You're a student in a big college and one day walk across a creep that ogles you. The creep then takes a picture of you, identifies you, and now has a pretty good idea of where to find you.
You accidently bump into a maniac on the street, he overreacts, and you argue with him. Before he leaves, he snaps a picture of you and vows revenge.
You may think that none of the scenarios described above will ever happen because facial recognition is only accessible by your Facebook friends. This fact, however, should not comfort you at all.
Consider that Facebook facial recognition data can probably be accessed through hacking. It can also be subpoenaed (who knows what Facebook's stance will be towards various regimes 10 years down the road?)
Most importantly, your Facebook network can be easily infiltrated. US government officials are already using Facebook to monitor suspected criminals. Recruiters and employers are using it to check up on workers. These people and institutions are taking advantage of the fact that many Facebook users indiscriminately friend people.
However, if even you Facebook friend only people you know in real life, you're still vulnerable to one of your friends' accounts being compromised (either by hacking or physical coercion), the compromise of Facebook's facial recognition data on its server, and the subpoena of Facebook facial recognition data.
The fact is that the existence of facial recognition data on Facebook inherently threatens your privacy. That's why you should tell Facebook to disable that feature for you and remove your data.